Overview
In an opinion issued today, Judge Engelmayer dismissed a putative class action lawsuit brought against rating agency Standard & Poor's for allegedly fraudulent misstatements contained in its ratings of Fannie Mae preferred stock. The plaintiffs had alleged that S&P's high ratings of the stock had induced them to buy. Judge Engelmayer dismissed the plaintiffs' state law securities fraud, common law fraud and negligent misrepresentation claims under SLUSA.
Plaintiffs do not dispute that the first three requirements for SLUSA preclusion are met, and they clearly are. This lawsuit is a covered class action of more than 50 persons involving claims of state law for a security that is traded on a national exchange. . . . Plaintiffs and S&P disagree, however, whether S&P's ratings of the Rated Stock (i.e., the allegedly fraudulent conduct) were issued "in connection with" the sale of Fannie Mae's securities. . . . Here, the Complaint is rife with statements alleging that S&P's ratings were crucial to Plaintiffs' purchase of the securities. In paragraph 4, the Complaint states that the "S&P rating contained in the Offering Circular was an essential element to investors when choosing to invest in the Rated Stocks." Compl. ¶ 4. Two paragraphs later, the Complaint states that "[a]bsent this solid [AA-] rating, investors would not have invested in the Rated Stock or would have demanded a higher dividend rate at a higher cost to Fannie Mae. As such, the S&P rating was a key element that allowed Fannie Mae to provide the Rated Stock to investors at the offered rate ofretum." ld. ¶¶ 6-7 (emphasis added). The Complaint further states that "S&P was critically important to investors here as the Offering Circular was the only information available on the Rated Stock. ... Without such a high rating, Fannie Mae could not have issued the Rated Stock .... The S&P rating contained in the Offering Circular was an essential element to investors when choosing to invest in the Rated stocks." ld. ¶¶ 39,42,47 (emphasis added). It adds that the "materially misleading statements and omissions ... went to the core of their investment decision regarding the Rated Stock." ld. ¶ 79. Similar such statements are repeated throughout the Complaint. See, e.g., id. ¶¶8, 10, 11,44,45, 75, 78, 92. On the bases of these statements, the Court concludes that Plaintiffs' allegations ofS&P's misrepresentations entirely "rest on" and "necessarily involve" their purchase of securities. Any contrary construction would rewrite the Complaint.Judge Engelmayer also dismissed the common law fraud claims on the basis that the credit ratings given by S&P were merely non-actionable opinions, not false statements of fact.