McGraw-Hill Cos.' Standard & Poor's and Moody's Corp. won dismissal of a lawsuit claiming the companies had defrauded investors who relied upon their ratings before buying $63 billion of investment-grade mortgage-backed securities.
U.S. District Judge Jed Rakoff in New York also dismissed some claims Wednesday against JPMorgan Chase & Co., Bank of America Corp.'s Merrill Lynch and ABN Amro Bank NV, a unit of Royal Bank of Scotland Group PLC, in a lawsuit filed by institutional investors.
The complaint claimed banks and ratings companies made untrue statements and omissions in registration statements and prospectuses for 84 offerings sold as safe.
In a two-page order, Judge Rakoff tossed claims against McGraw-Hill, Moody's, Merrill Lynch Mortgage Lending Inc., First Franklin Financial Corp. and Credit-Based Asset Servicing and Securitization LLC, or C-Bass, but did not elaborate on the reasons.
Judge Rakoff said he will explain his decision later when he files a written opinion.
"The likely reason to come from Judge Rakoff's opinion will be important to many defendants in financial-crisis litigation," said C-Bass attorney Jamie Wareham of Paul, Hastings, Janofsky & Walker LLP.
"The disclosures were adequate and the market knew of the risks associated with subprime products," he said.
S&P and Moody's face investor lawsuits and criticism by lawmakers for grading mortgage bonds too high and maintaining the ratings, even months after the housing market began to collapse and home-loan defaults surged in 2007.
In January, another judge in New York dismissed similar claims against the ratings companies in a lawsuit by investors who bought $100 billion of mortgage-backed securities sold by Lehman Brothers.
Moody's, S&P and Fitch Ratings also won dismissal on March 29 of a negligence and fraud lawsuit by two California investors who lost money on highly rated bonds.
U.S. Magistrate Judge Dale A. Drozd in Sacramento threw out the case, saying the investors' complaint was not specific enough about the alleged fraud. He said they could refile the lawsuit within 30 days if they can include more detail, such as misleading statements provided by the companies.
C-Bass packaged collateralized debt obligations that were underwritten by JPMorgan Chase, Merrill Lynch and ABN Amro, Wareham said.
Investors in the case before Judge Rakoff claimed that S&P and Moody's misled them, by disregarding some ratings guidelines, serving conflicting roles in evaluating and structuring the bonds, and sacrificing their independence to attract more business from clients.
The investors also said they would not have bought the mortgage-backed securities had C-Bass' registration statement not deceived investors about the underwriting and quality control of the loans that made up the investments.
Frank Briamonte, a spokesman for McGraw-Hill, said the company is pleased with the judge's decision.
Samuel Rudman, a lawyer for Iron Workers Local No. 25 Pension Fund, one of the investors who sued, and Michael Adler, a spokesman for Moody's, did not return calls.
Spokesmen for Merrill and JPMorgan Chase declined to comment.