Last week, San Francisco Superior Court Judge Curtis E.A. Karnow refused to dismiss the California Attorney General’s complaint alleging that S&P and McGraw-Hill Companies, Inc. violated the California False Claims Act. This lawsuit is one of many state lawsuits that followed the U.S. Department of Justice’s lawsuit alleging that S&P’s fraudulent ratings contributed to the 2008-2009 financial crisis and caused banks and federal credit unions to lose $5 billion. But California uniquely alleges violations of its false claims act statute. A full description of the AG’s complaint is available here.
The defendants had asked the court to dismiss the lawsuit, arguing that the Attorney General failed to allege a false claim for payment, let alone one paid with state funds, and that the Attorney General missed the three-year deadline to bring the CFCA claims. A detailed discussion of the defendants’ arguments is available here.
Judge Karnow rejected both arguments. He found that the AG’s allegations sufficed to state a claim under the CFCA because the “complaint alleges purchase of investments” and “I can infer from the complaint that S&P ‘caused’ [the public pension funds] to purchase the securities. This is good enough for present purposes.” Judge Karnow further noted that “S&P has not convinced me that as a matter of law the lost money in this case did not constitute a potential or actual injury to the public treasury.”
He then rejected the defendants’ argument that the statute of limitations bars the AG’s action, finding that they “have not demonstrated, as a matter of pleading, that the three-year statute of limitations has run.” Judge Karnow accepted as true, as a court must in a pleading challenge, the complaint’s allegations that the AG did not discover and could not have discovered S&P’s false, fraudulent or misleading representations until after June 15, 2008 because defendants stood by their ratings and claimed no wrongdoing. He noted that “[t]he widespread collapse of residential mortgage-backed securities and structured investment vehicles may not have made a reasonable person suspect that S&P’s ratings system was fraudulent or that anything unlawful had occurred. A reasonable person might well have believed the S&P; the Attorney General alleges that S&P stood by its ratings methods through mid-2008 and indeed it continues to do so now…”
Although the parties entered into a tolling agreement effective June 15, 2011, S&P argued that it is not covered by the agreement because it did not sign it. The AG responded that S&P is bound as a “successor” but the court noted the AG had not so pleaded. Judge Karnow nonetheless declined to dismiss the CFCA claims against S&P and asked the parties to confer about whether S&P should remain a defendant as to the CFCA claims and then advise the court on this issue at the next case management conference.
The defendants are likely to appeal the court’s ruling, and we will continue to monitor this action and any potential appeal.