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Cordray's attorneys: Complaint good enough in market collapse case

legalnewsline.comApr 19, 2012

By John O'Brien

NEW YORK (Legal Newsline) - The state of Ohio's complaint against the three major credit rating agencies, rejected by a lower court judge, provides at least a "plausible" basis for relief, attorneys hired by the State argued in a brief Monday.

The State filed its reply brief as it appeals a district court order in favor of the three rating agencies - Standard & Poor's, Moody's Investors Services and Fitch Ratings. Former Ohio Attorney General Richard Cordray said the trio was partly to blame for the collapse of the housing and credit markets.

Cordray is now the head of the Consumer Financial Protection Bureau, a federal agency created by the Dodd-Frank regulatory reform law, even though he was never approved by the U.S. Senate.

President Barack Obama used his power to make recess appointments in January to install Cordray in office.

"The gravamen of the (Ohio public pension funds') allegations is that the agencies' high ratings constituted a necessary part of the securitization and sale process for the subject (mortgage-backed securities)," the reply brief says.

"Indeed, institutional investors such as the funds would not have invested in the securities absent those ratings. And the complaint cites offering materials expressly stating the agencies got paid out of the MBS sale proceeds."

In his lawsuit, Cordray said the rating firms marketed mortgage-backed securities by giving them the highest ratings and lowest risk. He said the agencies put high ratings on toxic mortgage debt in return for high fees paid by those they were rating.

He alleged the agencies violated the Ohio Securities Act and committed negligent misrepresentation. The five Ohio funds made 308 separate investments in mortgage-backed securities from 2005-08.

Cordray said five Ohio public pension funds lost at least $457 million as a result of the agencies' actions.

In November 2010, Cordray lost to former Lt. Gov. and U.S. Sen. Mike DeWine, a Republican who inherited the lawsuit, in the state attorney general race. He had been elected to the post in November 2008 to serve the remainder of the term held by the previous attorney general, Marc Dann. Dann had resigned in May 2008 amid a sex scandal.

The private firms hired by Cordray for the lawsuit were: Lieff, Cabraser, Heimann & Bernstein of New York; Entwistle & Capucci of New York; and Schottenstein Zox & Dunn of Columbus.

Employees of the Lieff firm gave $50,000 to the Ohio Democratic Party in 2008. The party gave Cordray more than $1.8 million for his campaign that year.

The Schottenstein firm gave $23,500 to Cordray from 2008-10.

The State had been granted an extension to file its reply brief. Oral arguments have not been scheduled, according to the docket.

The State is appealing a September decision by U.S. District Judge James Graham that granted the motion to dismiss filed by the defendants.

The rating agencies rightly argue that they were not the sellers of the securities purchased by the Ohio funds," Graham wrote in his decision. "This leaves the Ohio funds to argue that the rating agencies are liable because they 'received(d) the profits accruing from such sale.'

"The Ohio funds contend that the rating agencies received profits because 'the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided.' Elsewhere, the complaint alleges that the rating agencies were not paid unless the 'target rating was attained' and 'the credit rating was issued.'"

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