against various Ohio pension funds and in favor of a group of rating
agencies, as to multiple alleged violations of the Ohio Securities Act and
alleged negligent misrepresentation. A copy of the opinion is attached.
Five state investment funds for the State of Ohio (the "Ohio Funds")
brought suit against various rating agencies (the "Rating Agencies") for
losses allegedly arising from the Ohio Funds' purchase of residential and
commercial mortgage-backed securities. Specifically, the Ohio Funds
claimed that the high credit ratings assigned by the Rating Agencies to
the securities were false, negligently assigned, and based on flawed
methodologies. The Ohio Funds further claimed to have relied on the
credit ratings in making their purchases and as a result, lost $457
million in purportedly "safe" investments.
The Rating Agencies moved to dismiss, claiming that their ratings were
predictive opinions and, absent specific allegations of fraudulent intent
or of a duty to the Ohio Funds, the Agencies could not be held liable for
alleged negligence in their methodologies.
The causes of action considered by the Court included the claim that the
Rating Agencies violated ORC s. 1707.41 of the Ohio Securities Act both by
offering materials that contained the "unfounded and unjustified AAA
ratings," and by failing to monitor and/or periodically update the
ratings. The Ohio Funds also asserted a claim under ORC s. 1707.43, which
extends secondary liability to anyone who "participated in or aided the
seller in any way" in making an unlawful sale of securities. Finally, the
Court also considered the Rating Agencies allegations of negligent
misrepresentation, and whether the Rating Agencies might owe the Ohio
Funds "a duty to act with reasonable care in preparing, assigning,
maintaining, and disseminating the AAA credit ratings assigned to each of
the securities" that the Ohio Funds purchased.
The Rating Agencies sought dismissal of the Ohio Securities Act
allegations on various bases, including immunity under the First
Amendment, preemption of Ohio law by the Credit Rating Agency Reform Act
of 2006, and statute of limitations grounds.
In considering these arguments, the Court noted that the relevant
statutory provision requires that an entity that "offers any security for
sale, or receives the profits accruing from such sale, is liable, to any
person that purchased the security relying on the [information] for the
loss or damage sustained by the relying person by reason of the falsity of
any material statement contained therein or for the omission of material
facts." Because liability under this provision required that the Rating
Agencies "receive the profits accruing from such sale," as opposed to
"work performed in preparation for a securities offering" as alleged by
the Ohio Funds, the Court ruled that the Ohio Funds' "has no merit."
The Court also examined the Ohio Funds' claims under Section 1707.43 of
the Ohio Securities Act, and concluded that it "fare[d] no better."
Specifically, the Court noted, in order to establish a, ORC s. 1707
violation, the Ohio Funds would have to "establish a predicate violation
by the seller and then show that the Rating Agencies are liable as ones
who "participated in or aided the seller in any way in making such sale."
However, in dismissing the second cause of action, the Court ruled that
the complaint "wholly fails to plead a predicate violation" and thus, the
"Rating Agencies thus cannot be held liable" under ORC s. 1707.43.
Finally, the Court also considered the Ohio Funds' claims that the Rating
Agencies "had a duty to act with reasonable care in assigning their credit
ratings and that they breached their duty by failing to manage and
disclose conflicts of interest, [by] using faulty models in determining
their ratings, and [by] failing to adequately monitor ratings." In
analyzing this question, the Court first considered whether New York or
Ohio law should apply.
Analyzing New York law, the Court noted that "a majority of courts have
held that [New York law] preempts common law claims relating to securities
transactions, if the claim does not require proof of intent." Further,
these decisions have generally given the New York Attorney General
"exclusive authority to prosecute such claims" no private right of action
is allowed," the Court ruled. In addition, "a claim of negligent
misrepresentation relating to a securities transaction is among the types
of claims preempted" because it does not require proof of intent." This
alone, the Court held, "would cause the Ohio Funds' claim of negligent
misrepresentation to fail under New York law."
Looking to Ohio law, the Court noted that in order to sustain a negligent
misrepresentation claim, the Ohio Funds would have to establish, inter
alia, that the Rating Agencies owed a duty to the Ohio Funds, and the
credit ratings were "actionable misrepresentations."
Specifically, "liability for negligent misrepresentation is limited to a
loss suffered "by the person or one of a limited group of persons for
whose benefit and guidance [the defendant] intends to supply the
information," rather than "the extensive, faceless, and indeterminable
investing public-at-large." Moreover, "liability may be imposed for
negligent misrepresentation only if the disseminator of the information
intends to supply it to a specific person or to a limited group of
However, in this matter, the Court held that the Ohio Funds "fail[ed] to
allege a special relationship [with] the Rating Agencies," or that "the
parties had any direct communication," or even that "the Rating Agencies
knew or foresaw that the Ohio Funds in particular would be relying on
their ratings." In addition, the pleadings suggested both "a widespread
availability of the securities and a widespread reliance on the ratings,"
rather than anything that could "support an inference that ratings were
communicated only to the Ohio Funds or only to pension funds" and thus,
the Rating Agencies did not owe a particular duty to the Ohio Funds.
Similarly, the Court noted, another crucial element of a negligent
misrepresentation claim is that the "misrepresentation generally must
relate to an existing or pre-existing fact" predictions about the future
and statements of opinion are generally not actionable." Acknowledging
the Rating Agencies' arguments that their ratings were "predictive
opinions," and that this was "a point the Ohio Funds [did] not seriously
dispute," the Court went on to note that opinions are actionable only
where the author "does not believe the opinion and the opinion is not
However, the Court noted, the complaint here failed to "allege that the
Rating Agencies did not believe their ratings," even though the Ohio Funds
alleged that "some employees believed that the ratings agencies could have
used methods that better would have informed their opinions." That Rating
Agency executives conceded, in hindsight, "that the models and data that
the rating agencies were using were deficient" does not make the rating
"false or misleading" and thus "Defendants are not liable under the
securities laws when their opinions, or those they reported, were honestly
held when formed but simply turn out later to be inaccurate."
The Court also considered the Ohio Funds' argument that "the ratings
agencies produced high ratings aimed at keeping business." Noting that
"the complaint stops short of alleging expressly that the leadership of
[the Rating Agencies] believed that their companies ratings were false or
were unsupported by models that generally captured the quality of the
securities being rated," the Court then ruled that "a complaint must
provide further factual enhancement to avoid dismissal under Rule
For these reasons, the Court granted the Rating Agencies' motion to
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.
Our updates are available on the internet, in searchable format, at:
CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.
IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.