Connecticut Sues Top Rating Agencies

Alleging that they gave artificially low credit ratings to states, municipalities and other public entities, Connecticut Attorney General Richard Blumenthal is suing the three major credit-rating firms.  
 
In three separate lawsuits, Mr. Blumenthal alleged Moody's Investors Service, Fitch Ratings and Standard & Poor's Ratings Services "systematically and intentionally" gave lower ratings to states, municipalities and other public entities than corporate and other forms of debt with similar or worse default rates.  
 
As a result, cities, school districts and other public bodies had to purchase bond insurance to improve their credit rating or pay higher interest costs, Mr. Blumenthal said.  
 
"We are holding the credit rating agencies accountable for a secret Wall Street tax on Main Street: millions of dollars illegally exacted from Connecticut taxpayers," said Mr. Blumenthal, a Democrat.  
 
The lawsuits, filed in state court in Hartford, name Moody's Corp., the parent of Moody's Investors Service; McGraw-Hill Cos., the parent of Standard & Poor's Ratings Services; and Fimalac SA's Fitch Inc. as defendants, respectively.  
 
The complaints, filed in conjunction with the Connecticut Department of Consumer Protection, allege that the rating firms violated the Connecticut Unfair Trade Practices Act by intentionally misrepresenting and omitting material facts that caused bond issuers in Connecticut to purchase bonds at higher interest rates, Mr. Blumenthal said.  
 
The attorney general's probe into the raters, bond insurers and related entities is ongoing, he said.  
 
Mr. Blumenthal alleged that the rating firms used a "different and far more difficult rating scale" for public bonds in order to justify their lower ratings for those securities.  
 
In the Moody's lawsuit, Mr. Blumenthal claimed Moody's underrated public bonds to protect the marketability of its own credit ratings and "to please sophisticated investors."  
 
"Moody's was not concerned about what it knew to be more accurate and fair ratings, it was concerned about whether use of those fair and accurate ratings would be good for its bottom line," the lawsuit alleged.  
 
In a statement, Mr. Blumenthal also said the bond insurers have coordinated their efforts to convince Moody's to maintain separate rating systems for municipal and corporate bonds.  
 
After bond insurers meet with Moody's, they reported "Mtg. went well we were preaching to the choir" and Moody's dropped any plans to change from its rating system, Mr. Blumenthal said in the statement.  
 
Fitch called the attorney general's lawsuit an "unfortunate development" and said it "believes the suit is without merit and intends to defend itself vigorously."  
 
"As the Attorney General knows, for several months, Fitch has been engaged in a comprehensive review of its municipal finance ratings framework with market participants," Fitch added. We have been planning to report our findings to the market tomorrow and still intend to do so."  
 
During a conference call Wednesday, Moody's Chief Executive Raymond McDaniel described the Connecticut suit as "meritless." He added: "We have been very public about the differences and reasons for those differences between the municipal rating scale and the corporate rating scale."  
 
McGraw-Hill described Connecticut's lawsuit as "simply a case of a state attempting to use litigation to dictate what bond rating it receives."  
 
The company said the claims violate its First Amendment rights and would result "in an erosion of analytical independence and undermine investor confidence in the market." It added: "S&P is committed to providing investors and the market with independent and quality ratings opinions."