Late last month, the Court of Appeal, First Appellate District, Division Three, ruled in CalPERS v. Moody’s that Standard & Poor’s and Moody’s Investors Service Inc. (S&P and Moody’s) must face the California Public Employees’ Retirement System’s (CalPERS) $1 billion lawsuit over S&P and Moody’s ratings of structured investment vehicles. The trial court’s ruling, which was “affirmed in full” by the Court of Appeal, rejected a request by the rating companies to dismiss the case under the anti-SLAPP law.
In the case, CalPERS (the largest state public pension fund in the country), sued S&P and Moody’s in 2009 for negligent misrepresentation based on highly favorable ratings that S&P and Moody’s gave to three structured investment vehicles (SIVs) that ultimately collapsed, costing CalPERS up to one billion dollars.
The trial court held, and the Court of Appeal affirmed, that the complaint was based upon conduct that fell within the scope of the anti-SLAPP statute (S&P and Moody’s met the first prong of the anti-SLAPP statute), but that CalPERS had shown a probability of prevailing on its claim for negligent misrepresentation (second prong of the anti-SLAPP statute). S&P and Moody’s appealed the trial court’s ruling on the first prong, and CalPERS cross-appealed to challenge the trial court’s ruling on the first prong.
First Prong – applicability
On the first prong, the Court of Appeal held that CalPERS’ action arose from S&P and Moody’s exercise of constitutionally-protected speech activities. CalPERS unsuccessfully argued that the trial court erred in finding that the “gravamen” of its claim arose from S&P and Moody’s “after-the-fact press releases and internet posts” to reporting services like Reuters and Bloomberg, while CalPERS insisted that its claim arose from the agencies “acts of engineering the SIVs while working hand-in-glove with the issuers, and then providing ‘AAA’ ratings to those insurers for use in the private placement sale of the SIV securities.” Thus, CalPERS contended that its claim “would have arisen even if [S&P and Moody’s] had never publicly disseminated the SIV ratings at all.”
The Court of Appeal disagreed, noting that CalPERS’ complaint itself made clear the negligent misrepresentation claim arose from allegations that the “Rating Agencies assigned untrue, inaccurate and unjustifiably high credit ratings to the [SIVs],” which were then “communicated to Plaintiff via the offering materials of the [SIVs], Ratings Agencies’ respective websites, through financial reporting services and directly to CalPERS authorized agent…”.
Thus, the Court of Appeal held that the lawsuit fell within the scope of the anti-SLAPP statute.
Second Prong – probability of prevailing
On the second prong, the Court of Appeal held that CalPERS made a prima facie showing of negligent representation. Going through the elements of a negligent misrepresentation claim, the Court of Appeal found that CalPERS made a prima facie case showing that: ratings are actionable statements (because they are a form of expert opinion that are essentially representations of fact), S&P and Moody’s did not have a reasonable basis for believing the ratings were accurate, S&P and Moody’s intended to influence CalPERS, and CalPERS actually and justifiably relied on the SIV ratings. The Court of Appeal held that CalPERS had submitted sufficient evidence (including expert declarations) to show that, among other things, the ratings should be treated as actionable statements of professional opinion for the purpose of the negligent misrepresentation cause of action and that CalPERS reasonably relied upon those opinions.
Because CalPERS met its burden on the second prong, the Court of Appeal affirmed the trial court’s denial of the anti-SLAPP motion. The Court of Appeal’s decision in this case demonstrates that rating agencies are not necessarily going to be protected by the anti-SLAPP law. In this case, the Court of Appeal agreed with the trial court that CalPERS’ lawsuit is not a SLAPP.