McGraw Hill

Liquidators of Bear Stearns Hedge Funds Accuse Rating Agencies of Fraud

On November 12, the liquidators for two Bear Stearns overseas hedge funds filed their complaint against McGraw Hill, Standard & Poor’s, Moody’s, and Fitch (collectively the rating agencies) in an action in New York Supreme Court alleging that fraudulent ratings led to over $1 billion in losses for the funds’ investors.  According to the complaint, the funds invested in a portfolio of high-grade structured finance products, including CDOs and RMBS, where “at least 90% had the highest rating available,” and therefore depended heavily on ratings in making investment decisions.  The complaint alleges that the rating agencies knew that the ratings assigned to the securities in which the funds invested were false.  Plaintiffs claim that the rating agencies lacked independence from the issuers of the securities and that their ratings were tainted by a desire to maintain market share in a profitable industry.  The funds also allege that the rating agencies used relaxed standards in their initial ratings and subsequently failed to conduct proper ongoing surveillance of rated securities, leading to delays in downgrading ratings for allegedly faulty securities.  The liquidators initially commenced the action in July through New York’s summons with notice procedure.  Complaint.

Second Circuit Affirms Dismissal of Class Action Against S&P Over MBS Ratings

On December 20, 2012, the Second Circuit affirmed a decision by Judge Sidney H. Stein of the Southern District of New York dismissing a putative class action suit alleging that Standard & Poor’s Ratings Services intentionally misled investors about the accuracy of its credit ratings for mortgage-backed securities.  The plaintiff pension fund, acting as a putative class representative of similarly situated shareholders, asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933 against S&P’s parent company, McGraw-Hill Cos. Inc., and two of its corporate officers.  The complaint alleges that defendants made false and misleading statements about the operations of S&P by concealing flaws in its rating methods.  Judge Stein ruled that plaintiff failed to prove the defendants made false statements in financial earnings or acted with knowledge of wrongdoing.  In particular, he found that statements promoting S&P’s independent and objective ratings were “mere commercial puffery” and could not form the basis of a securities fraud claim.  A Second Circuit panel issued a summary order affirming the decision, finding that the factual allegations did not give rise to a strong inference that McGraw-Hill executives misled investors about S&P’s services in order to artificially inflate McGraw-Hill’s stock price.  Order. 

Standard & Poor’s Receives “Wells Notice” Regarding CDO Rating

Standard & Poor’s parent company, McGraw Hill, disclosed in an 8-K on September 26, 2011 that it had received a “Wells Notice” from the Securities and Exchange Commission regarding the rating of a collateralized debt obligation in August of 2007. The CDO at issue, Delphinus CDO 2007-1, was largely based on subprime mortgage loans. The Wells Notice indicates that the SEC may initiate litigation seeking civil penalties, disgorgement of fees, and other appropriate equitable relief. SEC Filing.