Embattled ratings firms face legal battles

By Martha Graybow

NEW YORK (Reuters) - Battered by critics who blame them for helping to foment the U.S. subprime mortgage meltdown, credit raters are now trying to fend off lawsuits -- including fraud claims brought by their own shareholders.

Many financial companies, including banks and lenders, have been sued following the housing market bust; but the cases against ratings agencies may be among the most closely watched.

That's because the three biggest agencies -- Moody's Corp (MCO.N: Quote, Profile, Research, Stock Buzz), McGraw-Hill Cos Inc's (MHP.N: Quote, Profile, Research, Stock Buzz) Standard & Poor's division and Fitch Ratings, part of Fimalac SA (LBCP.PA: Quote, Profile, Research, Stock Buzz) -- have drawn fire from some politicians and investors for awarding top marks to subprime-linked securities that later disintegrated. They've also been criticized as being too close to issuers who foot the bill for their ratings.

Based on how prior cases have played out, the plaintiffs could face an uphill battle in court -- and ratings firms say they will vigorously defend themselves against the lawsuits. Plaintiffs lawyers, though, say that their claims are strong and that a government report unveiled this week finding "serious shortcomings" at the raters could bolster their cases.

"No one has really crossed the threshold to try to hold the rating agencies accountable for their faulty ratings," said Christopher Keller, a lawyer at law firm Labaton Sucharow LLP, who represents some of the plaintiffs in a shareholder case against Moody's.

"Without their complicity in this process (of rating mortgage-backed debt pools), most of these securities would never have come to market," he said.

The agencies have agreed to institute some reforms. Last month the three top agencies struck a pact with New York's attorney general to change how they charge fees for reviewing mortgage-backed securities. A separate probe by Connecticut's attorney general is ongoing.

Rating agencies have found themselves in court before. When they were sued by Enron investors for allegedly being too slow to downgrade the energy trader's debt, a federal judge dismissed the claims, saying the ratings analysts deserved the same kinds of First Amendment protections that shield journalists because their work was in essence opinion and not a guarantee.