A California appeals court has ruled that the California Public Employees’ Retirement System can pursue a lawsuit seeking hundreds of millions of dollars from credit rating agencies Standard & Poor’s and Moody’s for alleged negligent misrepresentations.
In its May 23 ruling, the California Court of Appeals affirmed a 2012 trial court decision that the nation’s largest public pension fund, known as CalPERS, had presented enough evidence to establish a probability of prevailing at trial. The early evidence test was required because the credit agencies sought to have the case dismissed under the state’s anti-SLAPP law, which is designed to discourage lawsuits that chill free speech but are unlikely to win at trial.
Considering the evidence put forward by CalPERS, the appellate court was persuaded that the agencies’ credit ratings of three structured investment vehicles (“SIVs”) were statements of past or existing fact, disagreeing with the rating agencies that they were mere future predictions on which investors should never rely.
In its unanimous 43-page ruling, the court said it was persuaded that the rating agencies had no reasonable grounds for their “AAA” ratings on the SIVs, which collapsed after CalPERS invested over $1.3 billion in 2006 and 2007. The court ruled that as a matter of law, the First Amendment did not protect the rating agencies for rating what the court described as “complex and esoteric nonregistered securities” sold via private placements in the Rule 144A market to qualified institutional buyers, and where the evidence showed that the rating agencies engineered the SIVs into existence in the first place.
The rating agencies are expected to request review by the California Supreme Court.
The case is California Public Employees’ Retirement System, Inc. v. Moody’s Investors Services, Inc., A134912 (Cal. Ct. Appeals, First District).