Standard & Poor’s

Rating Agency Developments

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On April 6, 2016, DBRS published its methodology for rating European structured finance transactions.

On April 6, 2016, DBRS published its methodology for ratings in the forest products industry. Report.

On April 6, 2016, DBRS published its methodology for ratings in the engineering and construction industry. Report.

On April 6, 2016, DBRS published its methodology for ratings in the industrial products industry. Report.

On April 5, 2016, Fitch updated its recovery ratings and notching criteria for non-financial corporate issuers. Release.

On April 5, 2016, Fitch published an updated report on rating criteria for letter of credit supported bonds and commercial paper. Report.

On April 5, 2016, Fitch published surveillance criteria for trust preferred CDOs. Report.

On April 1, 2016, Fitch updated its EMEA RMBS rating criteria. Release.

On March 31, 2016, S&P published its methodology and assumptions for rating North American single-tenant real estate triple-net lease-backed securitizations.  Report.

On March 31, 2016, Fitch updated its global criteria for rating wind power projects. Release.

Rating Agency Developments

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On April 24, Fitch released its updated U.S. Auto Lease ABS Ratings Criteria.  Report.

On April 27, DBRS released its Rating Canadian Covered Bonds Methodology.  Report.

On April 27, S&P updated its Bank Rating Methodology and Assumptions to add a new Additional Loss-Absorbing Capacity component, effective immediately.  Report.

On April 28, Moody’s released its Rating Methodology for the Homebuilding and Property Development Industry. Report.

RMBS Claims Against Ratings Agencies Dismissed as Time-Barred

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On March 27, 2015 Judge John Robert Blakely of the U.S. District Court for the Northern District of Illinois granted Standard & Poor’s Financial Services, LLC’s and Moody’s Investors Service, Inc.’s motion to dismiss claims brought by First National Bank and Trust Co. of Rochelle, Illinois arising out of First National’s purchase of certain RMBS certificates.  First National asserted causes of action under the Illinois Consumer Fraud and Deceptive Business Practices Act, the Uniform Deceptive Trade Practices Act, as well as other common law misrepresentation claims, alleging that it had been induced to purchase the certificates in reliance upon misstatements by the ratings agencies.  Judge Blakely dismissed the complaint as time-barred by the Illinois Securities Law’s five-year statute of repose.  He first concluded that the ISL’s statute of repose applied to First National’s claims because the facts alleged, if proven, would have established a violation of the ISL sections on fraud or deceit in connection with the purchase or sale of securities, and because the ISL specifically provided for the injunctive relief requested by First National.  Judge Blakely then found all claims untimely because the RMBS certificates at issue were purchased in February 2008, five years and four months before First National’s suit was filed.  Order.

Liquidators of Bear Stearns Hedge Funds Accuse Rating Agencies of Fraud

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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.

Bear Stearns Liquidators Brings Fraud Action Against Rating Agencies

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On July 9, the joint official liquidators of Bear Stearns & Co. Inc. filed suit against three rating agencies – Standard & Poors, Moody’s and Fitch – in New York state court over the agencies’ allegedly fraudulent investment ratings of RMBS and CDOs.  The plaintiffs allege that the defendant rating agencies knowingly misrepresented information as to the independence and accuracy of their ratings, while purposefully omitting material information from their credit rating analyses.  Plaintiffs bring a claim for common law fraud and seek over $1 billion in damages as well as punitive damages.  Summons with Notice.

Southern District of Ohio Dismisses Suit Against Ratings Agencies

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On September 26, 2011, Judge James L. Graham of the United States District Court for the Southern District of Ohio dismissed a lawsuit brought by five Ohio state pension funds against Standard & Poor’s Financial Services, LLC, Moody’s Investors Service, Inc., and Fitch, Inc., alleging violations of the Ohio Securities Act and negligent misrepresentation. The Ohio pension funds alleged that the credit ratings assigned to certain residential and commercial mortgage-backed securities were false, negligently assigned, based on flawed methodologies, and caused $457 million of losses. The Court, applying both Ohio and New York law to the negligent misrepresentation claim, dismissed all claims. The Court found that Defendants’ ratings were non-actionable opinions and, absent specific allegations of fraudulent intent or a duty to the Ohio pension funds, Defendants could not be held liable for alleged negligence in their ratings methodologies. Decision.

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

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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.

New York Court Orders Rating Agencies to Produce Internal Communications Regarding RMBS Ratings in Monoline Insurer Lawsuit

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Justice Eileen Brantsen of the Supreme Court of the State of New York ordered non-parties Standard & Poor’s Rating Services and Moody’s Investors Service, Inc. to produce their internal communications concerning their “shadow ratings” of certain RMBS certificates at issue in an action between monoline insurer MBIA and several Countrywide affiliates. MBIA maintains that it received and relied upon the “shadow ratings” in deciding whether to insure the Countrywide RMBS. MBIA argued that the requested documents were directly relevant to Countrywide’s alleged misrepresentations and the reasonableness of MBIA’s reliance on Countrywide’s representations regarding the quality of the loans underlying the RMBS. Order.

State of Connecticut’s Action Against Ratings Agencies Remanded to State Court

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On January 5, 2011, Federal District Court Judge Janet Bond Arterton of the District of Connecticut granted the State of Connecticut’s motion to remand its case back to state court. Defendants (Moody’s, McGraw Hill Co., and Standard & Poor’s) argued that the State was suing to benefit specific citizens, thus creating federal diversity jurisdiction. Judge Arterton concluded that the case, brought under the Connecticut Unfair Trade Practices Act, related to the State’s articulated interest in protecting all of its citizens from unfair practices, unique from the interests of individual investors, and therefore the State is a citizen of no state for diversity jurisdiction purposes. The court also found that the Class Action Fairness Act did not apply. Decision.