Jepsen’s focus turns to investors
Following February”™s $25 billion mortgage foreclosure settlement, Connecticut Attorney General George Jepsen is focusing on an even thornier issue: obtaining relief for Connecticut investors harmed by credit rating agencies and the structured financial products they rated.
Jepsen is continuing on a lawsuit originally filed two years ago by then-Attorney General Richard Blumenthal, now a U.S. senator. Blumenthal alleged that rating agencies violated the Connecticut Unfair Trade Practices Act by marketing their ratings as objective and accurate, a clear conflict of interest when they were collecting revenue from clients seeking favorable ratings on securities.
“I am pleased that this lawsuit is moving ahead,” Blumenthal said in an email, adding that he is hopeful the result will be “significant sanctions” for deceptive conduct, which misled individuals who put their trust in independent ratings.
“Powerful evidence shows that sham ratings deceived investors and enabled fraud that brought our nation to the brink of economic catastrophe,” Blumenthal said. “I am hopeful that ultimately this legal action will help protect investors from such illegal practices in the future.”
Last month”™s mortgage settlement involves 49 states, including Connecticut, as well as Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial.
“It is clear that the crisis impacted the economy of Connecticut,” said Matt Budzik, an assistant state attorney general, adding that Connecticut will gain nearly $190 million for its coffers and homeowners.
With pricey Fairfield County homes representing a sizable chunk of owners”™ net worth, the settlement will provide some relief. Recent foreclosure rates for lower Fairfield County have hovered around 4.6 percent, higher than those of the state and nation generally.
In the next phase, Budzik said that relief could come in the form of restitution for investors.
“Part of the reason we think that the credit-rating agencies are important is that they engaged in deceptive trade practices. All businesses should play by the same rules,” he said. “Our suit is for violation of Connecticut law and we will seek recovery for damages within Connecticut.”
One problem is that it is not yet clear how such a lawsuit would work out. Investors made as well as lost money on securitizations. In the case of mortgage foreclosures, it is clear who the damaged party was. In securitizations, the situation can be murkier.
In his original suit, Blumenthal sued Moody”™s and Standard & Poor”™s for knowingly assigning tainted credit ratings to structured finance products, or securitizations, backed by subprime loans.
He said at the time that “Moody”™s and S&P”™s alleged misconduct enabled the worst economic downturn in the nation since the Great Depression.”
The lawsuits, unique and unlike others filed on behalf of specific investors or pension funds, are sovereign enforcement actions brought under the Connecticut Unfair Trade Practices Act.
Moody”™s and S&P dominate the ratings market for structured finance securities. They are responsible for rating virtually all structured finance securities issued in the capital markets. Investors and other market participants rely on the agencies to fulfill their stated promise of independence and objectivity.
Connecticut reached a $900,000 settlement last October with the three major rating agencies, resolving claims that the companies unfairly gave lower credit ratings to public bonds.
After the lawsuits were filed, the rating agencies abandoned their dual ratings which resulted in the upgrade of the bond ratings for many cities in Connecticut and the resultant savings of millions of dollars over time. The Dodd-Frank Wall Street Reform and Consumer Protection Act now requires rating agencies to rate municipal bonds on the same scale as other bonds, which was a key demand of the Connecticut lawsuits.