This week brings news of the opinion issued (after a ruling earlier this year) by Judge Rakoff in the class action case brought by the Public Employee's Retirement System of Mississippi. Judge Rakoff does not need to be introduced to Securities Lawyer Blog readers - to review prior postings on his rulings, click here and here.
Judge Rakoff weighed in this week on the ratings agencies role in evaluations for securities offerings. The plaintiffs' claimed that the defendants including Moody's and McGraw-Hill Companies' Standard & Poor's were actually acting as underwriters. This claim was dismissed with prejudice. The plaintiffs' argued that securities were issued based on ratings agency evaluations and that these evaluations formed the basis of allegedly false and misleading statements in offering documents.
Calling this claim an "extremely broad view of what constitutes an underwriter" the opinion points out that under Sections 7 and 11 of the Securities Act of 1933 the security rating that is assigned by a nationally recognized statistical rating organization is not considered part of the registration statement prepared or certified by a person within the meaning of these sections. The opinion also notes that the SEC does not interpret underwriters as falling under these definitions.
According to law.com, there are a few defendants left in the case after dismissal of Merrill Lynch subsidiaries Merrill Lynch Mortgage Lending and First Franklin Financial, JPMorgan, ABN Amro, and Credit-Based Asset Servicing and Securitization. The remaining claims are now those brought against individual Merrill executives, Merrill Lynch Mortgage Investors, and Merrill Lynch, Pierce, Fenner & Smith.
As the opinion in the class action case was issued, and quite coincidentally, as Mr. Warren Buffet weighed in on the ratings agencies after having been subpoenaed to the Financial Crisis Inquiry Commission on the business practices of the ratings agencies. Mr. Buffett testified at the same hearing as Moody's Investor Services CEO, Raymond McDaniel.
The subpoena was issued after several attempts by the Commission to bring Buffett to the table voluntarily. Berkshire Hathaway is the largest Moody's shareholder and Mr. Buffett has been a big seller of Moody shares as well.
To view Mr. Buffett's testimony on the ratings agencies click here.
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