The ratings agencies seem to be everyone's favorite whipping boy these days. First it was the Securities and Exchange Commission using them as something of a scapegoat for the subprime debacle in claiming that the overburdened agencies
violated internal procedures in granting top rankings to structured products like collateralized debt obligations and residential mortgage-backed securities. Last week, Greenlight Capital's David Einhorn in a Financial Times interview
said the agencies are understaffed and therefore did not have the resources to properly rate some of the now failing financial institutions. And now Connecticut Attorney General Richard Blumenthal, who once again is making a name for himself, is arming for a legal battle with the big three ratings agencies -- Fitch Inc., Moody's Investors Service and Standard & Poors.
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Blumenthal on Wednesday filed suit against the agencies alleging that they have been giving municipal bonds artificially low credit ratings, costing taxpayers millions of dollars in unnecessary bond insurance and higher interest rates. His suit alleges that the agencies violated the Connecticut Unfair Trade Practices Act by "intentionally misrepresenting and omitting material facts that caused bond insurers in Connecticut to purchase bonds at higher interest rates," according to a statement from the Attorney General's Office.
The suit is the first court action taken in Blumenthal's probe into the ratings agencies that began in late 2007. His investigation is also examining possible antitrust violations, consumer protection and potentially other violations by credit ratings agencies and bond insurers. Blumenthal has taken aim at some big fish in his investigation with one of the biggest being the world's richest man Warren Buffett. The attorney general in May placed Buffett's Berkshire Hathaway Inc. under investigation for possible conflicts between its almost 20% stake in credit ratings agency Moody's Corp. and Berkshire Hathaway Assurance, the newly formed municipal bond insurance business. Blumenthal was looking to see whether Berkshire's holding has influenced Moody's debt rating on Buffett's bond insurer business.
A Moody's spokesman could not be reached. Fitch in a statement said, "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. We have been planning to report our findings to the market tomorrow and still intend to do so. Fitch believes the suit is without merit and intends to defend itself vigorously."
S&P fired back at Blumenthal, stating, "The claims asserted by the Attorney General violate First Amendment rights - which courts around the country have repeatedly ruled apply to rating agencies and their opinions - and would result in an erosion of analytical independence and undermine investor confidence in the market by allowing ratings to be determined by governmental mandate or the threat of litigation."
Blumenthal is a familiar name to dealmakers because of his strong antitrust stance. He first came on to the scene in 2001 when he challenged the merger of Northeast Utilities and Consolidated Edison Inc. He's also taken action or threatened action in Oracle Corp.'s hostile bid for Peoplesoft, Microsoft Corp.'s antitrust case, EchoStar Corp.'s failed deal for DirecTV Group Inc., among others. However, he's best known for suing private equity firm Forstmann Little & Co. on behalf of the state's pension fund, which was a limited partner in the firm's funds. He won the breach of contract case in 2004, but the jury awarded no damages. - Michael Rudnick
