STANDARD & POOR’S (S&P) has claimed that a settlement it has reached over allegedly misleading investors was not an admission of liability.
Moody’s and S&P, the two major ratings agencies, settled lawsuits on Friday with plaintiffs who had accused them of handing ratings much higher than they deserved to two US investment vehicles before they crashed in 2007.
However, McGraw-Hill, the parent company of S&P, said the settlement was made “without any admission of liability or wrongdoing”. The situation is particularly sensitive for S&P, which is facing a massive fraud case from the US government.
The two structured investment vehicles, Cheyne Finance and Rhinebridge, had bought billions of dollars’ worth of subprime mortgage derivatives, and subsequently collapsed during the subprime crisis in 2007.
In the months leading up to their demise, S&P and Moody’s had continued to hand the vehicles gold-plated ratings, which 14 plaintiffs led by Abu Dhabi Commercial Bank said had been misleading.
The plaintiffs had looked for more than $700m (£453m) in damages in cases that date back to 2008 and 2009, with a trial set to come to court next week.
S&P had claimed no wrongdoing, and that the ratings given are effectively opinions protected by the US constitution, which guarantees the right to free speech. However, the agency and Moody’s, along with Cheyne Finance’s creator Morgan Stanley, settled the lawsuit on Friday for an undisclosed fee. Fitch, the other major ratings agency, has previously settled separate cases over Rhinebridge and Cheyne Finance.
A guilty verdict in a trial would have been especially problematic for S&P because it is facing a $5bn fraud suit from the US Department of Justice, which claims that it inflated ratings in order to continue winning fees, while aware of the risk of subprime mortgages.
S&P has blasted the claims as “entirely without factual or legal merit” and “wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith”. The agency is still attempting to dismiss the case.
“This settlement allows us to put the significant legal defence and related costs, as well as the distraction, of these very protracted litigations behind us,” Moody’s said.
PROFILE: SUBPRIME’S CHEQUERED HISTORY
Cheyne Finance is set up by Morgan Stanley in August. The investment vehicle is run by UK hedge fund manager Cheyne Capital and, like many other funds, it invests heavily in derivatives from US subprime mortgages – high risk loans to borrowers with poor credit ratings.
Another investment vehicle, Rhinebridge, is set up by IKB Deutsche Industriebank, based in Dusseldorf, in early 2007. Like Cheyne Finance, it ploughs money into subprime mortgage derivatives. Both vehicles receive high ratings from agencies, some receiving ratings as high as the coveted triple-A guidance.
Throughout 2007, the level of mortgage defaults and home foreclosures skyrockets, leading to widespread financial chaos and causing huge losses on investments.
Cheyne Finance enters administration and in October, it becomes the first structured investment vehicle to stop repaying short term debt, causing massive losses for investors. Its assets stood at $6.6bn. Rhinebridge also defaults on debts.
As financial turmoil continues to hit investment funds and causes further economic woe, investors who stand to lose millions from their investments in Rhinebridge and Cheyne Finance start to bring lawsuits against IKB and Morgan Stanley, as well as the three ratings agencies Fitch, Standard & Poor’s and Moody’s. Plaintiffs include Abu Dhabi Commercial Bank – which claims that S&P and Moody’s have been “reckless or negligent” – and King County, Washington. The suits are contested by the agencies and banks.
Rhinebridge is eventually wound down in August 2008, costing investors 45 per cent of their $1.1bn investment in the vehicle.
Further lawsuits are brought from the likes of the California Public Employees’ Retirement System (Calpers). A Manhattan judge, Shira Scheindlin, rejects the ratings agencies’ key argument that the guidance they provide is protected by the first amendment of the US constitution, which guarantees a right to free speech, because they are not matters of public concern. However, the agencies continue to refer to that argument in future disputes.
Fitch settles lawsuit with Calpers over Cheyne Finance, although Calpers retains dispute with other ratings agencies.
Plaintiffs allege that Morgan Stanley pressured S&P and Moody’s to give higher ratings to Cheyne Finance. Court documents say that Morgan Stanley gained $30m in fees from the vehicle, and the ratings agencies gained $6m. Trial scheduled for May 2013.
IKB settles Rhinebridge case.
In February, S&P announces that it faces a $5bn civil lawsuit from the US Department of Justice, leading to the worst decline in parent company McGraw-Hill’s share price since 1987. Moody’s also falls substantially, despite it not being named in the case. S&P says the case would be without factual or legal merit.
In March, Fitch settles with plaintiffs over the collapse of Rhinebridge.
In April, Moody’s S&P and Morgan Stanley settle. Department of Justice suit against S&P still to be decided.