New type of post-housing crash lawsuit
Although the housing crisis took place several years ago, recent news shows its effects still exist today. The state of California has filed a lawsuit against credit rating agency Standard & Poor’s citing the False Claims Act as the basis for the action.
The state of California claims the agency violated this act in its recommendations that mortgage-backed securities were low risk; following this advice, California and several other states invested pension funds in these securities, resulting in later billion dollar losses, much to the dismay of teachers and other public employees whose pensions were affected.
Standard & Poor’s sued for $4 billion in damages
A Los Angeles Times report says the state is seeking $4 billion in damages from S&P, as the funds are believed to have been invested based on decisions derived solely from the agency’s ratings and recommendations. Agency ratings are received under the expectation that they are objective and unbiased; however several years later, many other organizations have also received blame for recommending and extending mortgage-backed securities that applicants couldn’t plausibly afford.
The proliferation of these securities resulted in huge losses, and the report states that two of California’s largest pension funds each lost approximately $1 billion in funding.
Similar lawsuits filed
Twelve other states, as well as the U.S. Department of Justice and District of Columbia, have filed similar lawsuits to recover losses that stem from these investments. Filing a lawsuit with the violation of the False Claims Act as the basis is unique in that it holds agencies to the same standard as an advertiser or marketer; these industries are heavily regulated in order to guard against selling products and services under false pretenses to consumers, and some believe that holding credit ratings agencies to these standards is the only way to cut down on the false representations that were regularly promoted
By implementing this same strictness in the investment industry and filing under the False Claims Act, the states are looking to hold agencies accountable for their recommendations and make them pay careful attention to the risk ratings that they assign. These losses have huge effects on a number of public employees, and state officials are going back to the influencers in the market to seek damages for the sake of those that have been affected by the advice they provided.