Second Circuit Holds That Rating Agencies Were Not "Underwriters" or "Controlling Persons" Within the Meaning of the Securities Act of 1933


In In re Lehman Brothers Mortgage-Backed Securities Litigation, Nos. 10-0712-cv, 10-0898-cv, 10-1288-cv, 2011 WL 1778726 (2d Cir. May 11, 2011), the United States Court of Appeals for the Second Circuit affirmed three lower court decisions holding that various defendant rating agencies, including The McGraw Hill Companies, Inc., Moody’s Investors Service Inc. and Fitch, Inc. (“Rating Agencies”), were not liable as “underwriters” or as “controlling persons” under Sections 11 and 15 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§ 77k, 77o. Rating agencies typically assign credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves; plaintiffs argued, however, that the Rating Agencies here exceeded their traditional, passive role as credit risk evaluators by actively aiding the issuers in the structuring and securitization process, thereby assuming the role of underwriters or controlling persons of the issuers. In rejecting plaintiffs’ arguments, the Second Circuit clarified who would qualify as an underwriter and controlling person under the Securities Act, and in the process stymied yet another attempt by securities plaintiffs to hold rating agencies liable for losses in rated securities.

This case consolidated three appeals that raised common questions of law. The underlying actions were brought by persons who had purchased mortgage pass-through certificates, registered with the Securities and Exchange Commission (“SEC”) and entitling them to distributions from underlying pools of mortgages. These certificates were rated by one or more of the defendant Rating Agencies.

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