Illinois Clears Legal Hurdle in Suit Against S&P

Illinois's attorney general won a circuit-court ruling to proceed with a lawsuit against Standard & Poor's Ratings Services alleging that the firm misled investors during the financial crisis.

The state's top prosecutor has accused S&P of seeking to boost its profits and cater to its banker clients by assigning its highest ratings to mortgage-backed securities that later imploded.

The ruling, delivered Wednesday by Cook County Circuit Court Judge Mary Anne Mason, is "very significant—it's the first hurdle you need to get over," Illinois Attorney General Lisa Madigan said. "What it really says is that S&P isn't going to be able to legally maneuver their way out of the fact that they committed fraud."

An S&P spokesman said the ruling "is simply a preliminary procedural ruling and does not address the merit of the attorney general's allegations." The firm expects "the court will ultimately find the claims to be unfounded."

The judge's decision to allow the Illinois case to proceed comes on the heels of a ruling Monday by an Australian court that S&P engaged in "misleading and deceptive" conduct by granting triple-A ratings on constant proportion debt obligations, or CPDOs.

That ruling is a legal setback for S&P, the world's largest credit-rating firm by number of outstanding ratings. The majority of postcrisis lawsuits filed against S&P, a unit of McGraw-Hill Cos., and its top rival Moody's Corp.'s Moody's Investors Service have been dismissed.

McGraw-Hill executives said in a recent earnings call that 30 cases have been dismissed against the firm since the financial crisis.

Analysts and investors say they are closely watching two cases against Moody's and S&P move through the courts—one filed by Abu Dhabi Commercial Bank and other institutional investors in federal district court in New York and another filed by the California Public Employees' Retirement System, the country's largest public pension fund.

The rating firms have triumphed for years in lawsuits by asserting their ratings are opinions that are protected by the First Amendment. The Illinois case appears to skirt that hurdle by focusing not on the ratings themselves, but on S&P's public statements about its ratings process being independent and objective.

The judge agreed with the Illinois attorney general that First Amendment protections didn't apply to this lawsuit. "Courts have long held that neither the federal nor state constitutions protects false, misleading or deceptive practices," Judge Mason wrote on Wednesday. "The First Amendment does not pose a bar to the claims asserted." A hearing is set for Dec. 12, according to court documents.

"Slowly but surely we're starting to see a growing number of lawsuits against S&P that the courts are refusing to dismiss," Ms. Madigan said.