The liquidators for two Bear Stearns Cos. hedge funds that
collapsed in the early days of the financial crisis accused three
major U.S. credit-ratings firms on Monday of fraudulently
misleading investors about the quality of their ratings.
The case is yet another battle over blame for the root causes of
the crisis, more than five years after Bear Stearns, a once
powerful investment bank, collapsed under the weight of
mortgage-related debt. The failure of the Bear Stearns hedge funds
in 2007 was one of the precursors to the market meltdown.
Monday's filing marked the official complaint for a lawsuit that
the liquidators initiated in July.
Geoffrey Varga and Mark Longbottom, the liquidators of the two
hedge funds, are seeking more than $1 billion in damages from
Standard & Poor's Ratings Services, Moody's Investors and Fitch
Ratings.
In a 141-page complaint filed in New York State Supreme Court,
the liquidators cited instant-message exchanges and other
communications as proof that analysts at the three firms were aware
that their ratings did not accurately reflect the risk of the
underlying assets.
In one 2007 conversation between two S&P employees, an
analyst suggests their company should not be rating a particular
investment. "We rate every deal," the other analyst responded,
according to the complaint. "It could be structured by cows and we
would rate it."
That conversation and several others cited in the complaint were
originally unearthed in separate legal inquiries, including a
continuing $5 billion civil case filed by the U.S. Department of
Justice against S&P.
In Monday's filing, the liquidators said the internal
conversations were the "razor-sharp tip of an iceberg of evidence"
showing that ratings firms were issuing reports they knew were
false in the run-up to the 2008 financial crisis.
Spokesmen for S&P, a unit of McGraw Hill Financial Inc., and
Fitch, owned by Fimalac SA, said the allegations were "without
merit and we will defend ourselves vigorously." A spokesman for
Moody's said "we believe the complaint is without merit and will
seek to have it dismissed at the earliest opportunity."
The liquidators began legal proceedings in July to ensure the
case was filed before the six-year statute of limitations for fraud
cases in New York state elapsed, according to their lawyer, James
McCarroll. Monday's filing was a more detailed complaint.
said Mr. McCarroll, a partner at Reed Smith. "They did this to
enrich themselves, without regard to the ultimate devastating harm
they knew it was likely to cause to investors worldwide, and
thereby to the global economy."
The case is also the latest iteration in the saga of the two
Bear Stearns hedge funds. Their failure in 2007 was an important
signal that Wall Street was facing an unprecedented crisis. Ralph
Cioffi and Matthew Tannin, the directors of the funds, were later
accused by the U.S. government of securities fraud. Both men were
acquitted in 2009.
The Securities and Exchange Commission filed a civil suit
against the men for allegedly misrepresenting the extent of the
funds' investments in subprime mortgages to investors. They settled
those charges in June 2012 by paying $1.05 million. Mr. Cioffi was
barred from industries regulated by the SEC for three years and Mr.
Tannin was barred for two years, according to the settlement.
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