In the aftermath of the recent financial crisis, the major U.S. credit rating agencies have increasingly become a target of regulatory investigation, legislative reform, and litigation by shareholders, investors, and state attorneys general over their ratings of complex structured finance securities.
A new discussion paper by Brattle economists surveys the recent economic research germane to the legal issues in these litigations. The core allegation in these lawsuits is that fraudulently inflated ratings led to investor losses in structured finance products. Rating agencies have historically relied on the First Amendment to protect themselves against civil liability for their ratings on corporate finance securities. However, several recent court decisions have found the First Amendment not applicable to the ratings on structured finance securities, since these ratings were primarily disseminated to small groups of investors in private placements. Still, investors face formidable hurdles in order to prove the rating agencies’ liability. The paper, “Economic Considerations in Litigation Against the Credit Rating Agencies,” discusses the importance of detailed analyses of the case-specific facts of the securities, the ratings assigned, and the investors involved, as well as the relevance of economic studies of the rating agencies’ actions and incentives.
The paper was co-authored by Brattle senior consultant Bin Zhou and associate Pavitra Kumar. A full copy of the paper is available for download below.