The state Supreme Court ruled on Wednesday that California’s public employee pension system can sue Moody’s and Standard & Poor’s for hundreds of millions of dollars due to the high ratings they gave to investments that collapsed in 2007 to 2008, according to an article in SFGate.
The article explained that due to the financial crisis, CalPERS suffered $10 billion in investment losses and is now suing for its $1.3 billion investment in 2006 in three financial products: Cheyne Finance, Stanfield Victoria Funding and Sigma Finance.
The suit alleged that the rating agencies' fee agreements had a built-in bias, entitling them to full fees only if they issued passing grades.
While investment ratings are a form of free expression, said the First District Court of Appeal in San Francisco, they are not mere expressions of opinion or predictions of success, which are immune from negligence suits. Instead, the court said, the ratings are factual assertions, issued "from a position of superior knowledge" about the investments' financial health, and thus can be challenged if made falsely and carelessly.