We previously posted about the Illinois Attorney General’s suit against Standard & Poor’s (“S&P”) attacking the independence of S&P’s ratings of mortgage-backed securities and CDOs. The Complaint in that action alleges that S&P engaged in a practice of “systematically misrepresenting that its credit analysis of structured finance securities was objective, independent and not influenced by either S&P’s or its clients’ financial interests,” and seeks penalties, disgorgement of profits and injunctive relief under the Illinois Consumer Fraud Act (“ICFA”)and the Illinois Uniform Deceptive Trade Practices Act. On November 7, 2012, the Circuit Court for Cook County denied S&P’s motion to dismiss.

Among other things, the court’s opinion held that S&P’s statements concerning its independence and objectivity were actionable representations, as opposed to “statements of opinion.” The court rejected arguments that the ICFA did not apply for lack of a direct transaction between S&P and Illinois consumers, and found that the state’s claims were not preempted under the federal Credit Rating Agency Reform Act (“CRARA”) of 2006.  CRARA requires the SEC to establish clear guidelines for determining which credit agencies qualify as “Nationally Recognized Statistical Rating Organizations” — S&P is one — and  gives the SEC the power to regulate credit agency internal processes such as conflicts checking and record keeping. The court found that “federal preemption is the exception, not the rule” and that there was no expressed Congressional intent in CRARA to “strip investors (and by implication, the States) of longstanding remedies for misconduct by rating agencies.” The court rejected a First Amendment challenge, and found that the state had adequately pled the claims under the ICFA, holding that:

As they do in the context of several other arguments, defendants focus on the complaint’s lack of detail as to particular structured finance security ratings on the assumption that these are the deceptive or misleading statements forming the basis of the claim. As already noted, this focus is misplaced and it is apparent that the complaint sets forth in sufficient detail the precise representations as to S&P’s independence and objectivity that the State claims were misleading and deceptive. The State need not identify who was exposed to defendants’ public statements, when they heard or saw them, and how those statements were material. Defendants’ pronouncements were made to all participants in the financial markets, the complaint identifies when they were made, and for reasons already articulated, they were clearly material.

Bloomberg News quoted Ed Sweeney, a spokesman for S&P in New York, as stating that “[n]otwithstanding this recent ruling, we continue to believe the case is without merit and will continue to vigorously defend ourselves.”

For additional news and analysis, see Illinois Clears Legal Hurdle in Suit Against S&P (WSJ).