Reed Smith Takes on Rating Agencies for Bear Stearns Funds
Now that the credit rating agencies don't look so invincible, they've been targeted in another case accusing them of handing out fraudulent ratings before the financial crisis. This time, the plaintiffs are the liquidators for two defunct hedge funds run by a Bear Stearns unit, who filed a fraud lawsuit against the three major credit rating firms in New York state court on Monday morning.
The new suit comes roughly four months after a key ruling in a $5 billion case brought by the U.S. Department of Justice against Standard & Poor's Financial Services. There, U.S. District Judge David Carter in Santa Ana, Calif., rejected a motion to dismiss and refused to accept S&P's argument that its statements about the integrity of its rating process are mere "puffery." The DOJ is suing under the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
Monday's complaint was filed by attorneys at Reed Smith, who represent Geoff Varga and Mark Longbottom, the liquidators of the Bear Stearns hedge funds. These funds invested heavily in collateralized debt obligations and collapsed in July 2007, serving as a harbinger of the economic troubles to come. The liquidators were appointed in 2008 by the Grand Court of the Cayman Islands, where the funds were based; any money they recover will be returned to the funds' investors. Previously, the liquidators sued JPMorgan Chase & Co. (which acquired Bear Stearns), Deloitte & Touche and the hedge fund managers Ralph Cioffi and Matthew Tannin. That case settled this summer for an undisclosed amount.
In an attempt to bring their case against the rating agencies within New York's six-year statute of limitations for fraud, Reed Smith filed a barebones summons in July, seeking damages of $1.1 billion, plus punitive damages, interest and attorney fees. Monday's complaint cites much of the evidence previously unearthed by the DOJ through its subpoena power and by private plaintiffs. (The evidence includes, for example, one S&P employee's oft-quoted text message that a particular mortgage deal "could be structured by cows and we would rate it.")
Reed Smith partner James McCarroll, who represents the plaintiffs, sent us this statement: "In fruitless efforts to evade liability, the rating agencies have argued that their ratings were not to be relied upon, and that they were mere 'commercial puffery.' This argument is an affront to the integrity of global financial markets, and it is time for these organizations to be held accountable for their misdeeds."
We reached out for comment to Floyd Abrams of Cahill, Gordon & Reindel, who represents S&P. He referred our inquiry to his client, which called the latest suit "without merit" and promised to mount a vigorous defense. The other agencies have also described the allegations as without merit.