The Washington Post

Liquidators sue three major rating agencies over hedge-fund losses

The liquidators of two Bear Stearns hedge funds filed a lawsuit Monday against the three major U.S. rating agencies, accusing them of fraudulently assigning inflated ratings to securities in the run-up to the financial crisis.

The lawsuit seeks to recover more than $1 billion from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings to cover losses sustained by the hedge funds.

The complaint filed in New York state court in Manhattan cites messages and e-mails by employees of the rating agencies to help build a case that the agencies misrepresented their independence and objectivity.

“It could be structured by cows and we would rate it,” the 141-page lawsuit quotes an S&P employee messaging a colleague.

Some of the same e-mails were cited in a $5 billion civil fraud lawsuit brought in a federal court in California by the U.S. Department of Justice against S&P in February. Fitch and Moody’s are not defendants in that lawsuit.

The latest case was brought by the liquidators of Bear Stearns High-Grade Structured Credit Strategies (Overseas) and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas).

All three rating agencies said in statements that the allegations were “without merit.”

The liquidators began their case in July, after the federal judge in the California case signaled that he would allow the Justice Department to pursue its lawsuit against S&P. More than a dozen states also have sued S&P.

James McCarroll, a partner at Reed Smith representing the liquidators, said his clients filed a summons and notice in July to beat an approaching six-year statute of limitations for fraud claims under New York law.

The collapse of the Bear Stearns funds in 2007 was an early harbinger of the financial crisis, whose triggers included broad-based downgrades by S&P and Moody’s of mortgage-backed securities that had previously been thought safe.

The lawsuit is the latest effort to hold rating agencies accountable for assigning ratings in order to win business.

The losses cited in Monday’s lawsuit were tied to funds managed by former Bear Stearns managers Ralph Cioffi and Matthew Tannin, who were acquitted in 2009 of federal criminal charges that they misled investors.

Last year, the two agreed to pay about $1 million to settle a related U.S. Securities and Exchange Commission civil case.

— Reuters



Success! Check your inbox for details. You might also like:

Please enter a valid email address

See all newsletters

Show Comments
Most Read



Success! Check your inbox for details.

See all newsletters

Your Three. Video curated for you.

To keep reading, please enter your email address.

You’ll also receive from The Washington Post:
  • A free 6-week digital subscription
  • Our daily newsletter in your inbox

Please enter a valid email address

I have read and agree to the Terms of Service and Privacy Policy.

Please indicate agreement.

Thank you.

Check your inbox. We’ve sent an email explaining how to set up an account and activate your free digital subscription.