Sixth Circuit Affirms Dismissal of Suit Challenging MBS Ratings by Major Credit Reporting Agencies

RMBS

On December 3, the U.S. Court of Appeals for the Sixth Circuit affirmed the dismissal of claims brought by Ohio public employee pension funds against major credit-rating agencies related to the sale of mortgage-backed securities. Ohio Police & Fire Pension Fund v. Standard & Poor’s Financial Services LLC, No. 11-4203, 2012 WL 5990337 (6th Cir. Dec. 3, 2012). The pension funds claim to have suffered estimated losses of $457 million from investments in MBS made between 2005 and 2008 allegedly caused by their reasonable reliance on the agencies’ false and misleading MBS ratings. The court affirmed the district court’s dismissal and held that the funds’ allegations lacked the requisite specificity to establish either a violation of Ohio’s “blue sky” laws or common-law negligent misrepresentation. Because the agencies’ fees were fixed rather than contingent on the success or proceeds of the sale, the court held that the agencies did not profit from the sale of MBS under the plain language of the statute.  The court also rejected the claim that the Agencies either aided or participated in securities fraud because (i) the pension funds offered no facts from which it was possible to conclude that an entity other than the Agencies engaged in securities fraud, and (ii) the pension funds did not adequately plead that the Agencies themselves made affirmative misrepresentations as to the MBS. In addition, the court affirmed the dismissal of the funds’ common-law negligent misrepresentation claims, determining that under both New York and Ohio law the agencies did not have a relationship with the funds that would establish a duty of care. Finally, the court found that the agencies’ MBS ratings were predictive opinions rather than affirmative false statements, and that the funds failed to adequately allege, beyond general criticism of their business practices, that the agencies did not believe the correctness of their ratings.