The 2nd U.S. Circuit Court of Appeals in New York on Wednesday gave the three major U.S. credit rating agencies a victory in dismissing the lawsuits seeking to hold them liable as "underwriters" for helping banks structure securities transactions to achieve desired ratings.
The ruling upheld three lower-court decisions for McGraw-Hill Co's Standard & Poor's, Moody's Corp's Moody's Investors Service and Fimalac SA's Fitch Ratings.
Rating agencies have been widely faulted, including by Congress, for contributing to the global credit and financial crises that began in 2007 by issuing high ratings on debt that proved risky. The agencies have in other litigation argued their ratings were opinion protected by the First Amendment.
In Wednesday's case, plaintiffs including union pension funds, Wyoming's treasurer and other investors had between 2005 and 2007 bought more than $155 billion of mortgage-backed and other securities, including many with the highest "triple-A" ratings, that lost value when they were later downgraded.
Some of the securities were sponsored by Lehman Brothers Holdings Inc; or the banking unit of IndyMac Bancorp Inc, which both went bankrupt in 2008.
The plaintiffs alleged that the rating agencies failed to act as dispassionate evaluators of credit risk, and instead actively aided in the securitization process, working closely with banks until the desired high ratings were achieved.
But the 2nd Circuit said the agencies were not liable under federal securities law as "underwriters," because they did not directly help distribute the securities, and rather simply enabled others to do so through their ratings.
"Merely commenting on draft offering documents does not constitute the requisite participation in underwriting," wrote Circuit Judge Reena Raggi, writing for a three-judge panel that also included Judges Jose Cabranes and Wilfred Feinberg.
The ruling affirmed three decisions by U.S. District Judge Lewis Kaplan in Manhattan.
Joel Laitman, a lawyer at Cohen Milstein Sellers & Toll PLLC representing many of the plaintiffs, said he is reviewing the decision. Lawyers for other plaintiffs could not immediately be reached.
Spokesmen for Moody's and Fitch said they were pleased with the ruling. An S&P spokesman called the ruling "unambiguous in concluding that credit rating agencies offer forward-looking opinions about credit risk."