(CN) - Standard & Poor's and other credit-rating agencies cannot be sued for touting mortgage-backed securities up until the collapse of that market in 2008, the 6th Circuit ruled.
In a 2009 complaint on behalf of five state funds, Ohio Attorney General Richard Cordray said that Standard & Poor's Financial Services, Moody's Investor Service, and Fitch Ratings had inflated their ratings of mortgage-backed securities (MBS), creating a bubble in the housing market that eventually burst.
Collectively known as the Big Three, the credit-rating agencies publish analysis and research on stocks and bonds.
The Ohio funds bought residential mortgage-backed securities and commercial mortgage-backed securities between 2005 and 2008, ultimately costing the state $457 million when the value of such securities collapsed.
Cordray said the agencies "negligently provided unjustified and inflated ratings in exchange for the lucrative fees" that securities issuers paid.
U.S. District Judge James Graham in Columbus dismissed the complaint with prejudice in September 2011 after finding that the funds had failed to state a claim under Federal Rule of Civil Procedure.
The funds took their case to the federal appeals court in Cincinnati, but a three-judge panel affirmed dismissal Monday.
"As the District Court held, there is no sound basis under either Ohio or New York law for concluding that the agencies owed a duty of care to the funds in this case," Judge Julia Smith Gibbons wrote for the court. "The District Court was also correct to dismiss the negligent misrepresentation claims because the complaint does not plausibly allege actionable misrepresentations."
"Even if we can presume that a credit rating can serve as an actionable misrepresentation, the funds' complaint does not contain allegations that would permit a reasonable inference of wrongdoing," Gibbons added.
The funds also failed to show that the agencies traded AAA credit ratings for fees or payoffs.
Gibbons scoffed at the final claim that the funds deserved a chance to amend their complaint.
"The funds never sought leave to amend before the District Court, despite ample opportunity to do so," the decision states. "And our default rule is that 'if a party does not file a motion to amend or a proposed amended complaint' in the District Court, 'it is not an abuse of discretion for the district court to dismiss the claims with prejudice. The funds' claims fail as a matter of law under established pleading standards."
Similar complaints against the agencies have not fared well, even though a Senate subcommittee found in 2010 that credit ratings agencies issued ratings on residential mortgage-backed securities that they knew to be inflated.
Subscribe to Closing Arguments
Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.