US - Standard & Poor's, Moody's Investors Service and Fitch Ratings must face the California Public Employees Retirement System's lawsuit claiming their faulty risk assessments on structured investment vehicles caused US$1bn in losses.
A state court judge in San Francisco rejected the companies' requests to dismiss Calpers' claims of negligent misrepresentation, Brad Pacheco, a spokesman for Calpers, the largest U.S. pension fund, said yestoday in a phone interview.
Judge Richard Kramer, in an April 30 ruling, tossed out a claim of negligent interference and said Calpers could renew that claim later, Pacheco said.
Calpers sued the three major bond-rating companies for $1bn in losses it said were caused by "wildly inaccurate" risk assessments. They used methods to analyze medium-term notes and commercial paper that were "seriously flawed in conception and incompetently applied," Calpers said in its lawsuit filed July 9.
The companies all gave their highest ratings to Cheyne Finance Ltd., Stanfield Victoria Funding LLC and Sigma Finance Inc., prompting Calpers to invest in them in 2006, the fund said in its complaint. The structured investment vehicles collapsed in 2007 and 2008, defaulting on payments to Calpers, the pension fund said. The underlying assets of the three firms, Calpers said, consisted primarily of risky subprime mortgages.
Moody's, S&P and Fitch face similar lawsuits by institutional investors in federal court in Manhattan. The companies have denied wrongdoing.
"We are pleased that the judge granted our motion to dismiss the claim of negligent interference with prospective economic advantage," Frank Briamonte, a spokesman at McGraw- Hill Cos., the parent company of Standard & Poor's, said in an e-mail.
"We are confident that when the court considers more than the plaintiff's baseless allegations -- which it was required to accept as true at this preliminary stage of the case -- it will be apparent that the facts and applicable law do not support the claim and we will prevail," he said.
David Weinfurter, a spokesman at Fitch, said in an e-mail that the company believes "the Calpers claim is fully without merit and we will continue to defend it to the fullest extent." Fitch is planning to appeal the judge's decision, he said.
Michael Adler, a Moody's Corp. spokesman, said in an e-mail that the company was pleased by the dismissal of one claim.
"We continue to believe the case is without merit, and we are confident that the remaining claim will be dismissed once the court is presented with the facts in the case," he said.
Calpers, with $211.1 billion in assets, manages retirement benefits for more than 1.6 million California public employees, retirees and their dependents.
The case is California Public Employees' Retirement Systems v. Moody's Corp., 09-490241, Superior Court of California, County of San Francisco.
--With assistance from Michael Marois in Sacramento and Cary O'Reilly in Washington. Editors: Michael Hytha, Peter Blumberg.
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