We first blogged about the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”) on May 14. As we explained, this statute provides a generous ten-year statute of limitations and a low burden of proof. Just as we predicted, the FIRREA story is beginning to heat up.

The most recent FIRREA litigation involves claims brought under this statute against ratings agency giant Standard & Poor’s. The DOJ sued S&P for $5 billion, accusing it of knowingly issuing ratings that didn’t accurately reflect mortgage-backed securities’ credit risk. S&P’s practices of issuing credit ratings to banks that paid for those services led to an inherent conflict of interest. To reassure banks and investors that its ratings were accurate, S&P issued a “Code of Conduct,” containing promises that it had established policies and procedures to address these conflicts of interest. The DOJ alleged that the “Code of Conduct” statements were false and material to investors.

On July 8, Judge David O. Carter of the Central District of California tentatively denied S&P’s motion to dismiss the case. In his tentative order, Judge Carter explained why S&P’s three arguments for dismissal were unpersuasive. First, he found that the allegedly fraudulent statements regarding the credibility of S&P’s ratings were not “mere puffery” because they were filled with “shalls” and “must nots” that went beyond mere aspirational language.

Second, Judge Carter rejected S&P’s argument that the DOJ had not sufficiently pled intent, finding that under FIRREA, intent need not be pleaded with the same particularly as under the PSLRA.

Third, Judge Carter rejected S&P’s argument that the DOJ failed to allege that S&P acted with specific intent to obtain money or property “from the parties who allegedly were deceived.” He explained that under FIRREA, the plaintiff only had to allege that the defendant specifically intended to deprive the victim of money or property. Judge Carter found it sufficient that the DOJ alleged S&P knew its scheme to defraud would result in S&P obtaining funds directly from the investors who were fooled by the ratings, since S&P charged its ratings fees to the banks.

We are eager to see Judge Carter’s final ruling, and whether more plaintiffs will attempt to play with FIRREA.