A judge in San Francisco has ruled that the California Public Employees Retirement System (CalPERS) may proceed with a lawsuit against Moody’s and Standard and Poors. The suit was brought in July 2009 on the grounds that the credit ratings agencies misled CalPERS investors by giving its highest ratings to three companies that tanked in 2007 and 2008.The ratings agencies claim the suit is groundless since ratings opinions are a matter of free speech. CalPERS counters that the agencies furnish investors with supposedly factual information, and “without reasonable grounds to believe that the representations were true.”
The three companies that defaulted on their payments to CalPERS: Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc were “structured investment vehicles” or SIVs. The assets underlying the SIVs (packages of loans, debt and sub-prime mortgages) were only known to the SIVs. CalPERs lost $1 billion in the investment. A similar suit brought by CalPERS against Fitch Ratings was dropped in August 2011.
Other public pension systems that have sued ratings agencies due to bad investments include the state of Ohio on behalf of the Ohio Police and Fire Pension Fund and the Ohio Public Employee Retirement System. In September a judge ruled that the opinions of ratings agencies are protected speech, dismissing Ohio’s $457 million suit.