Calpers, the biggest U.S. public pension fund, has sued the three largest credit rating agencies for giving perfect grades to securities that later suffered huge subprime mortgage losses.
The California Public Employees' Retirement System said in a lawsuit filed last week in California Superior Court in San Francisco that it might lose more than $1 billion from structured investment vehicles, or SIVs, that received top grades from Moody's Investors Service Inc, Standard & Poor's and Fitch Inc.
SIVs are complex packages of loans and debt, including subprime mortgages and collateralized debt obligations, pooled by investment banks and which then issue debt to investors.
By giving these securities their highest ratings, the agencies made negligent misrepresentations to the pension fund, Calpers said. Such ratings, which typically accompany investments with almost no risk of loss, proved to be wildly inaccurate and unreasonably high.
Calpers seeks unspecified damages.
S&P is a unit of McGraw-Hill Cos Inc
The claim is without legal or factual merit, and we will take action to have it dismissed, McGraw-Hill spokesman Steven Weiss said.
Calpers, Moody's and Fitch were not immediately available for comment.
The lawsuit from the powerful pension investor is the latest assault on the ratings agencies, which are under fire for their role in assigning top grades to investments that ultimately proved reckless.
Triple-A ratings are also blamed for fueling the explosion of the mortgage-backed securities and other structured debt investments that have wreaked havoc on Wall Street for nearly three years.
Issuers pay ratings agencies to grade their securities. Lawmakers and some investors say this model serves the interest of bank underwriters at the expense of those who buy the securities.
Calpers said it bought in 2006 $1.3 billion of medium and short-term debt issued by three SIVs: Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc. At the time, senior debt issued by these entities were rated AAA by S&P and Aaa by Moody's. Fitch gave Sigma, formed by London-based Gordian Knot in 1995, a AAA rating.
But the credit crunch that seized capital markets in 2007 led plunging prices for mortgages and other debt. SIVs led to massive write-downs to banks and funds that held them.
Sigma collapsed over the next two years, Calpers said, resulting in hundreds of millions, and perhaps more than $1 billion, of investment losses.
Calpers, which manages about $173 billion in pensions, noted the agencies had received huge fees from the issuers of the SIV. The methods used to rate the SIVs and their underlying assets were seriously flawed in conception and incompetently applied, the lawsuit said.
According to the lawsuit, a hearing has been scheduled for December 11.
Moody's shares were up 4 percent at $29.08 in morning New York Stock Exchange trade, while McGraw-Hill rose 2.7 percent to $31.69. In Paris, Fimalac was up about 1 percent.
(Reporting by Joe Giannone in New York and Hezron Selvi in Bangalore; Editing by Muralikumar Anantharaman and Lisa Von Ahn)