In first, Conn. sues Moody’s and S&P over CMO ratings

Connecticut’s attorney general sued Moody’s Investors Service and Standard & Poor’s over ratings the pair issued on risky investments.

In the civil lawsuit filed Wednesday, Attorney General Richard Blumenthal alleged Moody’s and S&P knowingly assigned false ratings to complex investments that pushed the country into recession.

The suit, which Blumenthal called the first of its kind against ratings agencies, is being brought under Connecticut’s unfair trade practices law. The attorney general is seeking penalties and fines that could reach into the hundreds of millions of dollars, he said.

“Moody’s and S&P violated public trust — resulting in many investors purchasing securities that contained far more risk than anticipated and that have ultimately proven to be nearly worthless,” Blumenthal said.

The securities in question are complex bonds backed by pools of mortgages. Most of the mortgages were subprime loans given to customers with shaky credit history. Those investments have lost much of their value in recent years as mortgage defaults skyrocketed.

The attorney general called the ratings process “deceptive and misleading” during a news conference. He said lucrative fees Moody’s and S&P received for rating the investments affected their objectivity in rating the debt. Companies issuing the investments paid Moody’s and S&P to rate it.

Many of the investments were given top “AAA” ratings during the peak of the housing market between 2005 and 2007. Then the market turned. Defaults mounted, home prices plummeted and the investments lost much of their value.

Most of the ratings have since been cut severely by Moody’s and S&P.

Steven Weiss, a spokesman for S&P’s parent McGraw-Hill Cos., said, “We believe the claim has no legal or factual merit and we intend to vigorously defend ourselves against it.”

A spokesman from Moody’s was not immediately available to comment.

Some pension funds have already sued Moody’s and S&P as well as Fitch Ratings over their role in rating risky investments that collapsed during the recession and credit crisis.

Wednesday’s lawsuit comes on top of past civil charges Blumenthal made against the ratings agencies claiming they created dual standards for rating government and corporate debt. In July 2008, Blumenthal accused Moody’s, S&P and Fitch Ratings of giving cities and towns artificially low credit ratings that ultimately cost taxpayers millions of dollars in unnecessary insurance and higher interest payments.

That suit is still pending.