April 9 (Bloomberg) — Standard & Poor's says the California Public Employees Retirement System can't blame it for almost $800 million in losses on top-rated investments that later collapsed because its assessments are opinions and not guarantees or facts.
McGraw Hill Financial Inc.'s S&P unit and Moody's Investors Service Inc. accuse Calpers, the largest U.S. pension fund, of trying to shift responsibility for the losses that occurred after it outsourced investment decisions to money managers who put $1.3 billion into three investment vehicles backed by subprime mortgages in 2006 and 2007.
The investments, made without the fund's knowledge, crumbled amid the housing crisis, according to court filings. Calpers sued the ratings companies in 2009 and a California judge ruled in 2012 that S&P and Moody's must face claims they made negligent misrepresentations.
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S&P and Moody's, seeking at an appeals court hearing set for today in San Francisco to reverse that decision, argue that ratings are predictions protected by free-speech rights.
"At the heart of Calpers's claim is an effort to hold the rating agencies liable for their publicly disseminated opinions on the grounds that these opinions failed accurately to predict the future," the companies said in court filings.
S&P is being sued separately for fraud in federal court in Santa Ana, California, by the U.S. Justice Department, which accuses the company of lying about its ratings being free of conflicts of interest and may seek as much as $5 billion in penalties. It also faces similar lawsuits by U.S. states, including one by California Attorney General Kamala Harris. A state judge in San Francisco refused in March to dismiss claims in that lawsuit.
Retaliation Law
In the Calpers case, S&P and Moody's base part of their arguments on a California law that they say protects them against retaliation for expressing opinions.
Calpers alleges S&P and Moody's did more than merely rate the structured investment vehicles, or SIVs, bought by the pension fund's managers. It said the companies helped create the SIVs with the issuers that paid for ratings, had access to information about them that was hidden from investors and bent the rules to give them their best ratings to boost profits.
"A credit rating privately delivered to issuers of a structured-finance security which is sold exclusively through private placement to a select class of investors is not entitled to First Amendment protection," Calpers said in a court filing.
The case is Calpers v. Moody's, A134912, California Court of Appeals, First District (San Francisco).
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