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Ohio Attorney General Richard Cordray filed a lawsuit
against Wall Street rating agencies on behalf of Ohio's
five public pension and retirement funds. (Photo/AP)
COLUMBUS, Ohio -- Adding to his growing list of litigation launched to hold Wall Street players accountable for the economic hurt their actions have visited on Ohioans in general and its public pension and retirement systems in particular, Attorney General Richard Cordray filed a lawsuit Friday against Standard & Poor's, Moody's and Fitch, three national agencies the market relies on to provide accurate credit ratings of investments.
We're not going to take it anymore
In a conference call with reporters, Cordray told Wall Street tycoons that "it is no longer safe to run roughshod over workers, retirees and families in Ohio - if you break a law and harm Ohioans, we will hold you accountable." Cordray, who said the lawsuit is based on a violation of Ohio securities law, directly accused the agencies of exchanging their highest ratings on mortgage-backed securities they knew were shaky for lucrative fees and massive profits. He said the securities were "no where as safe as the rating agencies said they were. "They sold out and sold us out," he said from his office in the Rhodes Tower in Downtown Columbus across from the Statehouse.
Filed in United States District Court for the Southern District of Ohio on behalf of five Ohio public employee retirement and pension funds, the lawsuit charges the rating agencies with wreaking havoc on U.S. financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers.
"The rating agencies were central players in causing the worst economic crisis in Ohio since the Great Depression," Cordray said in prepared remarks that were part of a morning conference call with reporters. Ohio is the only state other than California to sue the rating agencies, but Cordray said that while the basics are the same, Ohio's lawsuit will differ from California's. He gave no timetable for it ending, and said it differs from the other lawsuits Ohio has won funds in because this one is not a class action lawsuit.
He said the rating agencies assured Ohio employee pension funds that many of these mortgage-backed securities had the highest credit ratings and the lowest risk. But they sold their professional objectivity and integrity to the highest bidder. "The rating agencies' total disregard for the life's work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what's wrong with Wall Street today," he said.
Rating agencies exchanged highest ratings for lucrative fees and big profits
The lawsuit alleges the rating agencies gave many of these exotic investments the highest investment-grade credit rating. This rating – often referred to as "AAA"– is consistent with the credit ratings given to the safest corporate bonds, and it assured institutional investors, including the Ohio funds, that the investments were extremely safe with a very low risk of default.
According to preliminary estimates, the improper ratings cost the Ohio Funds losses in excess of $457 million.
"Contrary to the representations of the rating agencies, these mortgage-backed securities were, in fact, high-risk investments that lost tremendous value as the housing market collapsed and mortgage foreclosures accelerated," Cordray, a former state and county treasurer, said from his office in Downtown Columbus.
The lawsuit alleges that the rating agencies made spectacularly misleading evaluations of mortgage-backed securities due in part to the lucrative fees they received from the same issuers they were supposed to be objectively evaluating.
Cordray, a Democrat who will seek a full term as Ohio's top cop next year, said public statements and testimony indicate that "rating agency executives and analysts knew their ratings of mortgage-backed securities were wrong." He told reporters that one rating agency analyst admitted that the market for mortgage-backed securities was "little more than a house of cards" with a much higher risk of devaluation than indicated by the purported investment-grade "AAA" rating. Another rating agency analyst said that "we rate every deal. It could be structured by cows and we would rate it."
Cordray's announcement offered a startling statement by Raymond McDaniel, CEO and Chairman of Moody's, who described the ratings frenzy this way: "What happened in '04 and '05 … is that our competition, Fitch and S&P, went nuts. Everything was investment-grade. It really didn't matter… No one cared because the machine just kept going." McDaniel added that Moody's also "[drank] the Kool-Aid."
"This misconduct has caused immense harm to Ohio police officers, firefighters, teachers, government workers, investors and retirees," said Cordray, adding, "Our lawsuit against these rating agencies is another step toward holding Wall Street accountable for its wrongs."
The Ohio lawsuit is being brought on behalf of the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the Ohio Police & Fire Pension Fund, the School Employees Retirement System of Ohio and the Ohio Public Employees Deferred Compensation Program.
"The OPERS Board of Trustees authorized filing this litigation to ensure that we can rely upon the industry credit rating agencies to give us independent, objective information when making our investment decisions in the best interests of our members," said Cinthia Sledz, chair of the OPERS Board's Proxy Policy and Corporate Governance Committee, in the release. "This is a fiduciary responsibility that the board takes very seriously, and it is consistent with past actions the board has taken to encourage corporate governance reform and to seek compensation for unlawful behavior. It's with that same commitment to Ohio's public workers that we participate in this important litigation."
A statement from William Estabrook, Executive Director of the Ohio Police and Fire Pension Fund, was included in today's information."On behalf of Ohio's police officers and firefighters, our Board of Trustees agreed to join this suit in order to correct an abuse of public trust. We believe investors have a right to rely on the integrity of the ratings published by these companies," Estabrook said.
Cordray's fight to hold Wall Street accountable now includes eight major lawsuits, which have recovered more than $2 billion to date. Recent settlements include $284.5 million with secondary defendants in a case involving AIG; $400 million with Marsh & McLennan; $475 million with Merrill Lynch; and the canceling of $922 million in improperly granted stock options to corporate executives at UnitedHealth. Attorney General Cordray continues to represent the Ohio Funds in several major securities cases, including class action securities lawsuits against AIG, Bank of America, Fannie Mae, and Freddie Mac.
Will First Amendment defense be enough in this case?
Responding to a question about how his lawsuit is different than other lawsuits the ratings agencies have won based on their argument that the First Amendment protects them offering opinions, Cordray said his work in court will prove that the agencies were not "operating as objective, neutral arbiters but were in fact facilitating, promoting and aiding and abetting shaky investments they knew were false." The agencies, he said, were directly involved in the fraudulent ratings.
Cordray is not alone in his effort. His office is drawing on the expertise of the law firms Entwistle & Cappucci LLP; Lieff Cabraser Heimann & Bernstein LLP; and Schottenstein Zox & Dunn Co., LPA to assist with the litigation. Today's filing: www.OhioAttorneyGeneral.gov/SecuritiesLitigationBriefing.
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