Opinion ID: 806559
Heading Depth: 3
Heading Rank: 3

Heading: The Rating Agencies’ Conduct

Text: Anschutz directs a separate, but related, set of allegations against defendants Moody’s Investors Service, Inc. (“Moody’s”) and The McGraw-Hill Companies, Inc., doing business as Standard & Poors (“S&P”) (jointly, the “Rating Agencies” or the “Rating Agency Defendants”), the credit rating agencies that assigned ratings to the ARS at issue. Moody’s assigned an “Aa2” credit rating to the Dutch Harbor and Anchorage Finance offerings, a rating reserved for securities “judged to be of high quality and . . . subject to very low credit risk.” S&P assigned an “AA” rating to the same ARS, thereby indicating that the “obligor’s capacity to meet its financial commitment on the obligation is very strong.” Anschutz alleges that these ratings were false and misleading for four reasons. First, Anschutz argues that the Rating Agencies should not have assigned any rating to these ARS, because the put option feature made it impossible to predict the probability of default. Second, Anschutz asserts that 4 The SEC Order rejected as insufficient disclosure documents that (1) “did not disclose anything about bidding by broker-dealers”; (2) disclosed that “[a] broker-dealer may submit orders in Auctions for its own accounts”; or (3) disclosed that “[a] Broker-Dealer may submit orders in Auctions for its own accounts. Any Broker-Dealer submitting an order for its own account in any Auction might have an advantage over other bidders in that it would have knowledge of other orders placed through it for that Auction (but it would not have knowledge of orders submitted by other Broker-Dealers, if any).” 7 the Rating Agencies should have downgraded the ratings on these ARS by mid-2006 or early 2007, when they knew or should have known that the ratings were undeserved. Third, Anschutz argues that, due to the “put option” feature, these ARS were effectively “contingent capital arrangements” designed to ensure the availability of cash in times of crisis. As a result, Anschutz claims, the ARS ratings should have been based not on the credit quality of Ambac at the time the ARS were issued, but on the (lower) credit quality of Ambac when the put feature would likely be exercised. Finally, Anschutz asserts that the ratings were false representations about the “ready liquidity” of the ARS. Anschutz alleges that it relied on the original ratings in making its purchasing decisions and that, if it had known the ratings were false and misleading, it never would have purchased the ARS at issue. When the ARS market evaporated, the Rating Agencies downgraded their ratings for the Dutch Harbor and Anchorage Finance ARS, and ultimately withdrew those ratings altogether.