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October 2009 /$4
Los Angeles lawyerMark Labaton explains the roleof credit default swaps intriggering the collapse of the financial markets
page
24
Economic Crisis and the Law
SwapMeet
EARN MCLE CREDITPLUS
Tax Relief forPonzi Scheme Victimspage10Reopening DivorceSettlementspage 15Opening aHome Officepage 18
SwapMeet
Tax Relief forPonzi Scheme Victimspage10Reopening DivorceSettlementspage 15Opening aHome Officepage 18
Banks underFDIC Receivershippage 31Liability of BondRating Agenciespage 38Banks underFDIC Receivershippage 31Liability of BondRating Agenciespage 38
2 0 0 9 - 1 0 L A C B A D i r e c t o r y
P U L L O U T S E C T I O N
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Los Angeles Lawyer
October 2009
According to Thomas Friedman, a
New YorkTimes
columnist, “There are two superpow-ers in the world today….There’s the UnitedStates and there’s Moody’s Bond RatingService.”
1
As if to prove this point, claimsagainst rating agencies arising from theircredit rating activities have historically beenunsuccessful against the defense that creditratings are opinions protected under the FirstAmendment.
2
Under the standard articulatedin
New York Times v. Sullivan,
3
opinionscannot serve as a basis for liability unlessthe plaintiffs can establish actual malice by thecredit rating agencies. These agencies havealso won some early cases on the basis of thejournalist’s privilege and related shield laws,which provide a First Amendment-baseddefense to discovery requests seeking thebasis for credit ratings.
4
Nevertheless, in June2009, the California Public EmployeesRetirement System filed suit in San Franciscoagainst Moody’s,
5
Fitch,
6
and Standard &Poor’s
7
for negligent misrepresentation intheir ratings of $1.3 billion in “structuredinvestment vehicles.”There is some hope for the Calpers law-suit. An emerging trend in the law invali-dates the credit rating agencies’ FirstAmendment defenses and related journalistshield law defenses. The leading cases in thisline suggest that four key elements need to bepresent to successfully assert rating agency lia-bility in cases not involving misrepresentationor outright fraud:
•
The rating agencies are paid for their creditratings by the issuer or underwriter of thesecurities.
•
The ratings are provided to a limited groupof recipients to whom the securities are mar-keted and sold, rather than to a larger pub-lic audience.
•
The rating agencies actively participate inthe structuring of the securities transactionsfor which the ratings are provided.
•
Taken together, these circumstances showthat either privity or “near privity” existsbetween the rating agencies and the limitedgroup of plaintiffs to whom the securitieswere marketed and sold.
8
The role of rating agencies in the struc-turing, marketing, sale, and compensationschemes of many of the financial products andderivatives that were a key factor in lastyear’s financial collapse went far beyond thebounds of traditionally protected journalis-tic analysis or opinion making. Rather, the rat-ing agencies were active participants in thestructuring of toxic mortgage-based debtinstruments, from which they profited hand-somely. Their complicity in these debt secu-rity arrangements may be enough to overcomeexisting rating agency protections, a possibilitythat is finding increasing favor in govern-
Mark Anchor Albert is a business litigator andappellate lawyer in Los Angeles.
Ratings wars
The lawsuit filed by Calpers may be able toovercome the ratings agencies’ traditional FirstAmendment defense
by Mark Anchor Albert
A M A N E K A N E K O
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