S&P Fraud Cases Booted Back to 17 State Courts

MANHATTAN (CN) - Potentially exposing Standard & Poor's to higher legal costs and multiple judgments, a federal judge found that state courts must hear the 17 fraud cases against it.

New Jersey was the last of the group to file suit, but the cases against Standard & Poor's Financial Services have been piling up for years. They allege that the ratings giant and its parent, McGraw Hill Financial, defrauded investors in relation to their ratings for structured financial products known as residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs).

Those 17 state cases, one of which also presses claims against Moody's Corp., were consolidated before U.S. District Judge Jesse Furman in New York, along with two declaratory judgment actions that S&P filed against South Carolina and Tennessee.

Furman dismissed the declaratory-judgment actions Tuesday and remanding the 17 state actions back to the state courts.

While "state courts are courts of general jurisdiction, federal courts are courts of limited jurisdiction and possess only that power authorized by Constitution and statute, which is not to be expanded by judicial decree," the 52-page ruling states.

For the states, "the presumption against federal jurisdiction is especially strong" because the cases involve "states seeking to vindicate quasi-sovereign interests in enforcing state laws and protecting their own citizens from deceptive trade practices and the like," Furman wrote.

"Put simply, S&P and Moody's fail in their efforts to rebut that presumption, as the state cases arise solely under state law and Congress has not authorized federal courts to hear such cases," he added.

Furman concluded by saying "this court is not free to disregard or evade [t]he limits upon federal jurisdiction, whether imposed by the Constitution or by Congress."

S&P and Moody's also faces civil enforcement actions brought by the United States, California, Connecticut and Illinois, but these cases are pending in California and the respective state courts, respectively.

Furman cited the order remanding the Connecticut action in saying that "with few exceptions, the doors to federal court do not swing open merely because a [party] has a national presence or is alleged to have committed wrong doing that is national in scope."

Mere efficiency is likewise not sufficient to justify federal jurisdiction.

S&P spokesman Edward Sweeney said in a statement that that the company is "committed to fully defending against these meritless claims upon their remand to the state courts."

Olha Rybakoff, senior counsel for Tennessee and leader of the states in the litigation, told Reuters that "the states are extremely pleased with today's ruling."

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