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S&P is dealt a setback in Connecticut case over ratings

By Jonathan Stempel and Aruna Viswanatha

(Reuters) - A federal judge handed a legal defeat to Standard & Poor's, ruling that a lawsuit in which Connecticut accused it of fraudulently inflating credit ratings to win business should be moved back to the state court where it began.

In a decision late Wednesday, U.S. District Judge Stefan Underhill in Bridgeport, Connecticut, said S&P and its parent, McGraw-Hill Cos , waited too long to move the March 2010 lawsuit by Connecticut Attorney General George Jepsen to federal court from state court. He did not rule on the case's merits.

The decision came two days after the largest U.S. credit rating agency asked a federal judge in Los Angeles to dismiss the U.S. Department of Justice's $5 billion civil fraud lawsuit filed in February over its ratings.

In that case, the government said S&P knowingly inflated ratings of risky mortgages and other securities, fueling demand from investors who believed the ratings were objective and helping trigger the 2008 financial crisis.

S&P had been seeking to move lawsuits by 15 U.S. states and the District of Columbia to federal court. On May 30 it is expected to ask the U.S. Judicial Panel on Multidistrict Litigation to consolidate litigation before a single federal judge.

Combining the cases could streamline the litigation, avoid conflicting rulings, and help S&P obtain better results than if it were forced to defend against claims under state consumer laws, where burdens of proof can be lower.

Underhill rejected the argument by S&P and its lawyers, including First Amendment specialist Floyd Abrams, that the February 5, 2013, filing of 13 of the other lawsuits entitled the rating agency to a new 30-day clock to move Connecticut's lawsuit.

"Although it may be tempting to find federal jurisdiction every time a multibillion-dollar case with national implications arrives at the doorstep, succumbing to that temptation is barred by the careful limits Congress has placed on the jurisdictional reach of federal courts," Underhill wrote.

In a statement, Jepsen said he was pleased with the decision and was "prepared to litigate the matter in Connecticut Superior Court, where it belongs."

S&P spokeswoman Catherine Mathis said, "The timeliness grounds for the ruling do not apply to the more recently filed actions by other state attorneys general."

Before S&P sought to move it, the Connecticut case had not been expected to be ready for trial until roughly late 2014.

The Department of Justice lawsuit is the first major federal action against a credit rating agency since the financial crisis.

A hearing is set for May 20 before U.S. District Judge David Carter in Los Angeles. S&P's main rivals, Moody's Corp's Moody's Investors Service and Fimalac SA's Fitch Ratings, were not sued by the federal government.

In afternoon trading, shares of New York-based McGraw-Hill were down 1 cent at $51.80 on the New York Stock Exchange.

The case is Connecticut v. McGraw-Hill Cos et al, U.S. District Court, District of Connecticut, No. 13-00311.

(Reporting by Jonathan Stempel in New York and Aruna Viswanatha in Washington, D.C.; Editing by Dan Grebler and John Wallace)

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