New Jersey Attorney General’s Consumer Fraud Suit Allowed to Proceed Against Investment Ratings Company

S&P500_(1950-12).jpgA superior court in New Jersey denied a motion by the credit rating agency Standard & Poor’s Financial Services (“S&P”) to dismiss a lawsuit brought under the New Jersey Consumer Fraud Act (CFA), N.J. Rev. Stat. § 56:8-1 et. seq. Hoffman, et al v. McGraw Hill Financial, Inc., et al, No. ESX-C-216-13, opinion (PDF file) (N.J. Super. Ct., Essex Co., Dec. 31, 2014). The New Jersey Attorney General is alleging financial and advertising fraud involving mortgage-backed securities, which were a major factor in the 2008 financial crisis. The case, which should be of interest to New Jersey small businesses and consumers alike, has traveled to federal court, to a multidistrict litigation (MDL) matter, and back to state court.

S&P publishes research and analysis of stocks and bonds, maintains indices like the S&P 500, and issues credit ratings for private companies and government entities. The New Jersey Attorney General alleges that, from at least 2001 to 2008, S&P based its ratings of various mortgage-backed securities on its own financial interests, and gave favorable ratings to companies that were paying clients, even if they did not merit such a rating. Numerous other states and the federal government have sued S&P over the same general allegations.

The New Jersey lawsuit (PDF file), originally filed on October 9, 2013, asserts three causes of action against S&P and its parent company: (1) Misrepresentations and knowing omissions of material fact under the CFA, N.J. Rev. Stat. § 56:8-2; (2) unconscionable commercial practices under the CFA, id.; and (3) misrepresentation and knowing omissions of material fact in violation of the Advertising Regulations, N.J. Admin. Code § 13:45A-9.2(a)(9).

The defendants removed the case to the U.S. District Court for the District of New Jersey the day after it was filed, and the court transferred it to the Southern District of New York on November 12, 2013. It was joined to an MDL matter consisting of lawsuits by nineteen states and the District of Columbia. New Jersey and other states filed motions to remand to state court. The New York federal court eventually ruled that it lacked subject matter jurisdiction over many states’ lawsuits, since they did not raise federal questions. State of Maine v. McGraw-Hill Companies Inc et al, No. 1:2013cv03969 – Document 73 (S.D.N.Y 2014), citing 28 U.S.C. § 1331.

On remand, the defendants moved to dismiss the lawsuit for failing to state a valid claim and for lack of jurisdiction. The court denied the motion as to both claims. With regard to the “failure to state a claim” argument, the defendants argued in part that the CFA does not apply to transactions involving securities and related services. Hoffman, opinion at 27. The court noted, however, that S&P does not sell securities, but rather “advertised, offered for sale, and sold ratings of structured finance securities.” Id. at 28 (emphasis in original). It also held that the defendants did not meet their burden of proving that “the exercise of jurisdiction in New Jersey would…be unreasonable” even though “they have purposefully targeted activities at residents in New Jersey.” Id. at 23.

Business attorney Samuel C. Berger offers fixed-fee packages of legal services businesses and entrepreneurs in New York City and Northern New Jersey. We represent our clients in a wide range of matters, helping them understand their rights and obligations as business owners and allowing them to run their businesses efficiently and effectively. Contact us today online or at (212) 380-8117 to schedule a confidential consultation with an experienced and knowledgeable business law advocate.

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Photo credit: By Mogrifier5 (Own work) [CC BY-SA 3.0], via Wikimedia Commons.