The California Court of Appeals heard oral argument recently in a significant lawsuit in which CalPERS is accusing credit rating agencies of negligence in rating structured investment vehicles that collapsed shortly after the pension fund had invested $1.3 billion.
Joseph J. Tabacco, Jr., a Berman DeValerio partner, argued the appeal April 8 on behalf of CalPERS, the nation’s largest public pension fund. Defendants Standard & Poor’s and Moody’s brought the appeal after a lower court rejected their attempt to have the lawsuit dismissed under a California’s anti-SLAPP statute, which was designed to stop companies and other powerful persons from threatening or initiating costly litigation simply to silence or intimidate critics. The rating agencies argued that their ratings are free speech deserving of protection under this statute and that they cannot be liable for predicting the future. A ruling is expected by early July.
In CalPERS v. Moody’s et al., the pension fund alleges that the credit rating agencies negligently misrepresented that the senior notes issued by three structured investment vehicles (SIVs) were of “AAA” creditworthiness, i.e., that they were likely to repay investors to a “AAA” certainty. Under California law on negligent misrepresentation, professionals can be liable for their opinions to certain groups of people if they are stated without any reasonable grounds for believing them. Auditors, for example, have been held to this standard for more than 20 years.
In 2006 and early 2007, CalPERS invested over $1.3 billion in short-term corporate notes issues by SIVs named Sigma, Cheyne and Stanfield Victoria. Within months, these supposedly safe, “AAA” securities collapsed and defaulted on their debts to senior note holders such as CalPERS. CalPERS sued the rating agencies in July 2009, seeking to recover nearly $700 million in losses. Berman DeValerio partners Todd Seaver and Daniel Barenbaum also represent CalPERS in the matter.
During oral argument, the appellate panel focused on the nature of credit ratings and whether they are statements of past or existing fact (which CalPERS must prove) or whether they are non-actionable predictions of the future.
In a lively argument, the Court of Appeals’ three-judge panel asked the parties if they agreed that the rating agencies bring a “special skill” to their credit rating activity, and whether the particular type of ratings here – for opaque, complex structured-finance securities – affects what the credit ratings represent.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.