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S&P Seeks to Merge State Suits Into One

Source: Dow Jones

Posted on 28 Mar 2013 by Neilson

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S&P lawsuit

Seventeen lawsuits have piled up against Standard & Poor's Ratings Services by state attorneys general who claim the firm churned out shoddy ratings before or after the financial crisis.

S&P wants to yank the cases into a federal court -- and shrink the total to one.

The moves are an important skirmish in a legal battle that could wind up costing S&P billions of dollars if the firm loses the cases or settles them to cut its losses.

Winning the fight to merge the cases into a single lawsuit in federal court could help S&P limit its legal exposure by streamlining the damage claims against the rating firm, a unit of McGraw-Hill Cos.

In recent court filings from Connecticut to Colorado, lawyers for S&P contend that the 17 state-court suits should be removed from those courts because rating firms are regulated under U.S. securities laws.

"Congress has expressly found credit ratings and the management of potential conflicts of interest related to them to be 'of national importance,' " S&P said in a filing Monday in an Iowa district court.

In addition, S&P contends that it should have to defend itself against only one merged case. It cites words and phrases that repeatedly popped up in state suits against the rating firm, most of which were filed in February.

"This case is one of nearly twenty virtually identical cases -- fourteen of them filed the same day -- brought by a coordinated group of state attorneys general against [S&P] arising out of the exact same alleged conduct," S&P's lawyers wrote in the Iowa court filing.

State prosecutors are fighting S&P's moves, claiming there is no legal basis to give the rating firm what it wants.

In a filing Monday, Iowa prosecutors criticized S&P for insinuating "darkly that state officials have coordinated among themselves with their enforcement." State attorneys general have worked closely together, which is "effective law enforcement," the Iowa prosecutors said.

Such squabbles are common in sprawling legal quagmires such as the S&P lawsuits. But some legal experts said it is unusual for a company to try to "consolidate" in a federal court cases that were filed under state consumer-protection laws.

The decision on whether to combine the state cases will be made by a federal panel, likely in coming months. Meanwhile, district-court judges are collecting and reviewing arguments about where the state lawsuits should be decided.

In February, the U.S. Justice Department filed a civil lawsuit in federal court in Los Angeles alleging that fraudulent ratings by the firm caused federally insured banks and credit unions to suffer losses on mortgage-related investments.

Most of the state-court suits were filed the next day, and some attorneys general flanked U.S. Attorney General Eric Holder at a news conference in Washington.

U.S. prosecutors are seeking more than $5 billion in damages from S&P, while state officials want to collect at least that much in their lawsuits.

S&P, the world's largest credit-rating firm, has repeatedly denounced the state and federal lawsuits as "meritless." The rating firm has until April 22 to formally respond to the U.S.'s allegations in court.

Shrinking the number of courtrooms where S&P faces a fight also could save the rating firm millions of dollars in legal bills -- and help the battalion of lawyers defending the company focus their efforts.

Edward Fuhr, a partner at Hunton & Williams LLP who heads the law firm's corporate and securities litigation practice, said S&P has a "very strong argument" to streamline and move the state-court cases because ratings issued by S&P and its two biggest rivals are an important cog in U.S. federal securities markets.

"I don't think you want that governed by 50 different state laws," Mr. Fuhr said.

Connecticut Attorney General George Jepsen said the state's suit against S&P "should be in state court because we are seeking to enforce state law. . .not federal law, and therefore there is no federal jurisdiction."

Craig Huber, an analyst at Huber Research Partners LLC who follows McGraw-Hill, said it would be "much easier for investors to track one consolidated case in federal court as opposed to numerous, overlapping state attorneys general cases."

It is possible S&P will win its bid to move some state lawsuits to federal court but lose in other states.

A decision by the federal panel to consolidate state-court cases would apply only to those moved to federal court.

In California, S&P and Attorney General Kamala Harris have agreed in a recent procedural move that the state's February lawsuit is "related" to an earlier suit filed by the California Public Employees' Retirement System for allegedly inflated ratings.

But there has been no move toward a merger of those two cases, the California Attorney General's Office said.