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Rating agencies under pressure as CalPERS lawsuit given green light

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  • Rating agencies under pressure as CalPERS lawsuit given green light

GLOBAL - Credit rating agencies have come under pressure from two sides of the Atlantic after a law suit filed by the largest pension fund in the US has received the green light, and the European Commission is considering tightening regulations.

The $173bn (€136bn) California Public Employees' Retirement System (CalPERS) has been given the go-ahead by a court judge in San Francisco for the lawsuit it filed against three agencies over ratings given to certain investment vehicles in 2006.

CalPERS filed the lawsuit at the end of last year against Moody's, Fitch and McGraw Hill - including Standard & Poor's - and a hearing this month overruled a motion by the defendants to dismiss the main claims of negligent misrepresentation, allowing the case to proceed.

The complaint alleges that the three rating agencies gave three structured investment vehicles (SIVs) - Cheyne Finance, Stanfield Victoria Funding and Sigma Finance - an "untrue, inaccurate and unjustifiably high credit rating" in 2006 by assigning them AAA status. The complaint states these vehicles subsequently collapsed in 2007 and 2008, resulting in "hundreds of millions, and perhaps more than $1bn, of investment losses for CalPERS".

The pension fund allges that the rating agencies made "negligent misrepresentations to CalPERS and CalPERS' money manager agents, which have caused and will cause CalPERS to suffer substantial investment losses" by giving the SIVs the highest possible credit rating. CalPERS claims that the agencies were the "only entities" outside those managing the SIVs that knew what assets were held by the opaque structures.

The rating agencies had issued demurrers - motions to dismiss the claims - on the main allegation of misrepresentation and also on claims of negligent interference with prospective economic advantage. The latter allegation was based on the premise that the pension fund would not have invested in SIVs without the agencies' rating, and there was a "high degree of certainty" CalPERS would suffer injury by the agencies' alleged "negligent rating actions". The court allowed the objection to this allegation.

Clark McKinley, information officer at CalPERS, said: "The court should issue its written opinion in a few weeks. This is a good result for us. We will discuss with counsel whether we will pursue re-alleging the negligent interference claim."

The next phase of the lawsuit is discovery, although McKinley said this could be delayed if the rating agencies decided to appeal the court order.

Meanwhile, at a meeting of the European Parliament's Economic and Monetary Affairs Committee (ECON) with EU Commissioner for Internal Market and Services Michel Barnier, MEPs criticised the role of credit rating agencies in evaluating countrie's creditworthiness.

Jean-Paul Gauzès, a French EPP MEP, argued: "Credit rating agencies must not be considered as gurus but as one of the actors in the field. They should not be considered as a panacea."

Jurgen Klute, a German GUE/NGL MEP went further and questioned whether there was "any point at all in credit rating agencies evaluating countries". In response to the questions, Barnier said he believed it was time to "go further down the road of regulating the work of these agencies". He also added that the Commission intended to develop the idea of a European credit rating agency. 

This follows comments by Barnier's predecessor Charlie McCreevy in 2008, when he warned the EC could regulate ratings agencies if they did not produce their own solution to perceived conflicts of interests. (See earlier IPE article: EC to regulate ratings agencies)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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