Enforcement Action Against Rating Agency Allowed To Proceed

        by: Peter J. Gallagher (@pjsgallagher)

In an interesting decision issued today, Judge Katz (Essex County) denied a motion to dismiss filed by the ratings agency Standard & Poor's ("S&P") in an enforcement action brought against S&P by the New Jersey Attorney General. In Hoffman v. McGraw-Hill Financial, Inc., the Attorney General alleged that S&P violated the Consumer Fraud Act ("CFA") by misrepresenting to New Jersey consumers that S&P's analysis and rating of structured finance securities was independent and objective. The opinion contains decisions on both procedural personal jurisdiction issues and substantive CFA issues that all litigators should find interesting.

[Lawsuits against ratings agencies are nothing new. Several years ago, I wrote an article about these lawsuits and, at the time, the relative success the rating agencies had defending against them. (If you did not save your copy of the article, click here for another copy.) Historically, the rating agencies argued that their ratings were proetced under the First Amendment, but at least one court rejected this argument in the context of a motion to dismiss in a lawsuit that eventually settled.]


While the question of whether, or in what circumstances, a rating agency can be liable for its allegedly misleading ratings is an important one, perhaps the most interesting part of Judge Katz's decision was his holding that S&P had consented to general jurisdiction in New Jersey. S&P had moved to dismiss the complaint for lack of personal jurisdiction. Judge Katz concluded that the Court had general jurisdiction over S&P, not because S&P had continuous and systematic contacts with New Jersey, but because it had consented to general jurisdiction in New Jersey when it registered to do business in the State. The Court agreed with S&P that recent U.S. Supreme Court decisions made clear that “merely conducting business within a state is not enough to confer general jurisdiction,” but held that these decisions did not deal with the entirely separate question of whether a party had consented to jurisdiction in a state. On that issue, the Court concluded that S&P had consented to general jurisdiction in New Jersey when it registered to do business in the State. (The Court also held that the Court could exercise specific jurisdiction over S&P because of its contacts with the State related to the underlying claims asserted by the Attorney General.) Unless overturned on appeal, this is an important holding for anyone representing “foreign” corporations in New Jersey.   


On the substantive CFA issues, the Hoffman decision is equally instructive. S&P argued that it could not be liable under the CFA because “transactions involving securities and any services related to transactions involving securities” fell outside the ambit of CFA. The Court rejected this argument, holding that S&P was taking too broad a view of prior case law, which had only excluded the sale of securities from the scope of the CFA, not all services related to the sale of securities. The Court observed that S&P “has gone to great lengths to contend that it does not sell securities,” therefore it could not take advantage of this rare exception to the CFA’s applicability. Having resolved this threshold issue, the Court then held that, assuming all of the facts in the complaint to be true, the Attorney General had sufficiently alleged a cause of action under the CFA — that S&P made certain statements and that those statements were deceptive. (The Court noted that, in the context of an enforcement action under the CFA, the Attorney General need not demonstrate any “ascertainable loss,” which is an element of a private lawsuit seeking damages under the CFA.)

While Hoffman is only an unpublished, trial court opinion, and therefore not binding precedent in any court, Judge Katz’s opinion is nonetheless one that defense counsel should read. Moreover, the case is not likely to end soon — the Court noted that the parties estimate that discovery will involve more than 30 million pages of documents — so stay tuned for more.

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