WASHINGTON - Connecticut Attorney General Richard Blumenthal has filed motions to remand back to state court the lawsuits he filed this summer against the three major credit rating agencies.
The legal actions allege that the agencies gave municipalities and their bonds lower credit ratings than were merited, costing taxpayers millions of dollars in unnecessary bond insurance and higher interest rates.
The procedural motions, which are virtually identical and were filed Sept. 29, roughly a month after attorneys for the Moody's Corp., Fitch Inc., and the McGraw-Hill Cos., the parent company of Standard & Poor's, moved the suits to the federal district court of Connecticut, in Hartford. The rating agencies argued that the parties to the cases have a "diversity of citizenship" - meaning they are citizens of different states - and that a federal court was therefore best suited to hear the case. All three rating agencies are based in New York City.
But in his motion last week to remand the cases back to the Connecticut Superior Court, Blumenthal argues that state "has a clear and compelling sovereign interest in this case" based on its own "unfair trade practice" law. The law authorizes the commissioner of the state Department of Consumer Protection to instruct the attorney general's office to bring suits in state court against "persons" suspected of violating the act. Corporations are considered "persons" for the purposes of the law.
Blumenthal filed his suit against the three rating agencies in late July, on the same day that the House Financial Services Committee approved a bill that would require the agencies to rate municipal general obligation bonds and other debt solely on the basis of repayment. The bill, which was not voted on by the full House before it went on recess, followed a push by issuers to convince rating agencies to switch to a "global" rating scale for municipal debt.
"All three credit rating agencies systematically and intentionally gave lower credit ratings to bonds issued by states, municipalities, and other public entities as compared to corporate and other forms of debt with similar or even worse rates of default," Blumenthal said in July.
The motions to remand said that the rating agencies' attempts to move the cases to federal court are "defective" because they are premised on "mischaracterizing the state's complaint as seeking recovery on behalf of a subset of Connecticut citizens."
"The complaint makes no such claim," the motion said, adding that the state's citizens have been harmed by the rating agencies's "illegal conduct and that the state is entitled to the equitable remedies expressly provided for by Connecticut law."
The rating agencies had slowly come to embrace a global ratings scale, but Fitch and Moody's said this week that they would delay implementing the changes because of the financial crisis.
Frank Briamonte, senior director for corporate communications at McGraw-Hill, reiterated yesterday the firm's belief that the suit has no merit.
"We continue to believe the suit is without merit and will vigorously defend against it," he said.
A spokesman for Moody's also said the suit was without merit and that the firm will fight it. A Fitch spokesman declined to comment.