WORLD PROPERTY CHANNEL ®

(NEW YORK, NY) -- The three biggest bond-rating companies in the U.S. are being sued by Ohio Gov. Richard Cordray for allegedly misleading investors by giving certain mortgage-backed securities higher ratings than they deserved.

Richard Cordray

The U.S. District Court lawsuit claims actions by Standard & Poors, Moody's and Fitch Ratings caused Ohio employee investment funds to lose more than $457 million.

The companies, all based in New York City, deny the allegations and maintain the suit is without legal merit.

In eight related suits against other defendants, Cordray has recovered more than $2 billion in damages to date, according to DSNews.com.

Recent settlements include $284.5 million from AIG and $475 million from Merrill Lynch.  In separate pending class-action securities-related suits, Cordray is suing AIG, Bank of American, Fannie Mae and Freddie Mac.

Cordray's suit against Standard & Poors, Moody's and Fitch alleges the three rating services knew their ratings on the mortgage-backed securities were wrong but still gave them a higher than merited rating.

"The rating agencies assured our employee pension funds that many of these mortgage-backed securities had the highest credit ratings and the lowest risk," the suit alleges.

"But they sold their professional objectivity and integrity to the highest bidder" in exchange for lucrative fees from securities issuers, according to the suit.

"The rating agencies' total disregard for the life's work of ordinary Ohioans caused the collapse of our housing and credit markets, and is at the heart of what's wrong with Wall Street today," the suit states.

The suit alleges the three agencies ranked many mortgage-backed securities with the highest invest-grade credit rating of AAA.  The AAA rating generally goes to the safest corporate bonds with the lowest risk.

Cordray states, "Contrary to the representations of the rating agencies, these mortgage-backed securities were, in fact, high-risk investments that lost tremendous value as the housing market collapsed and mortgage foreclosures accelerated."

Raymond McDaniel

In testimony last year before a Congressional committee in Washington, DC, Moody's CEO Raymond McDaniel acknowledge his company, along with S&P and Fitch, had lowered their rating standards to win market share, according to DSNews.com.

"What happened in '04 and '05...is that our competition, Fitch and S&P, went nuts," McDaniel wrote in an internal memo that was widely publicized in October 2008, according to DSNews.com.

"Everything was investment-grade," McDaniel had written.  "It really didn't matter."

The three agencies maintain Cordray filed the suit to blame someone instead of himself for investors' losses in Ohio. 

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