Rating Agencies Are Looking More Vulnerable To Lawsuits

September 20, 2010 by · Leave a Comment
Filed under: SEC, The Rating Agencies 

For over 70 years, when faced with lawsuits challenging the ratings they assigned to investments that later turned sour, rating agencies have successfully defended themselves by invoking their First Amendment rights. Although the agencies’ string of victories is still impressive, they are beginning to appear more vulnerable.

There are several major lawsuits that have progressed beyond the pretrial phase. These could possibly end with settlements that would prove very expensive for the agencies as well as establish a model for future litigation.

Two judges have also rejected the rating agencies’ First Amendment defense. In one case, Federal Judge Shira Scheindlin in Manhattan, ruled that the First Amendment did not apply because the rating agencies had, “disseminated their ratings to a select group of investors rather than to the public at large.”

Additionally, it was disclosed recently that the Securities and Exchange Commission has warned Moody’s that it may sue. At issue is how several of Moody’s executives allowed some European derivatives to keep high ratings even after they had learned that the grades were the result of a computer error.

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