In a significant ruling with potentially wide-reaching implications, Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York dismissed the Securities Act of 1933 causes of action (Sections 11, 12, and 15) against McGraw Hill and Moody's (the "Rating Agencies") in In re: Lehman Brother Mortgage Backed Securities Litigation. A copy of the ruling, which occurred at the close of oral argument on January 26, 2010, can be found on page 26 of the transcript of the oral argument.
While the exact grounds for the ruling will not be provided until Judge Kaplan issues a written opinion, it appears that Judge Kaplan based his ruling on the fact that the Rating Agencies were not "underwriters" under Section 11(a)(5) or "sellers" under Section 12. In particular, Judge Kaplan appeared to discount the plaintiffs' argument that the registration statement failed to disclose the fact that issuers regularly engaged in rate-shopping and that the Rating Agencies routinely helped issuers structure offerings of mortgage-backed securities with an eye toward achieving the highest credit ratings. Further, Judge Kaplan rejected the plaintiffs' contention that the Rating Agencies were "controlling persons" under Section 15 of the Securities Act. Here, the plaintiffs argued that the Rating Agencies were control persons of the issuing trusts because they helped to structure the offerings.
Depending on the precise grounds for the dismissal provided in the forthcoming written opinion, this ruling could have wide-ranging implications for the significant number of mortgage-backed securities class actions that are currently pending against the Rating Agencies in which the prevailing theory of liability is that the Rating Agencies acted as underwriters.