California Federal District Court Allows Government’s FIRREA-Based RMBS Suit To Proceed


On July 16, the U.S. District Court for the Central District of California denied a major credit rating agency’s motion to dismiss a DOJ complaint alleging that the firm defrauded investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by issuing inflated ratings that misrepresented the securities’ true credit risks, and by falsely representing that its ratings were uninfluenced by its relationships with investment banks. U.S. v. McGraw-Hill Cos., Inc., No. 13-779, slip. op (C.D. Cal. Jul. 16, 2013). The court held that the government met its initial pleading burden, in part, because it sufficiently had alleged that the rating agency “engaged in a ‘scheme to defraud investors in RMBS and CDOs tranches’ and ‘to obtain money from these investors by means of material false and fraudulent pretenses, representations, and promises, and the concealment of material facts’ with ‘intent to defraud.’” In doing so, the court allowed the government to pursue its $5 billion claims grounded in the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The court did not, however, consider the weight of the government’s evidence, specifically whether the rating agency’s alleged statements and conduct were part of an actual “scheme to defraud,” a key element to any FIRREA claim.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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