Royal Park Investments SA/NV, a “bad bank” created to hold distressed mortgage-backed securities acquired by Belgian bank Fortis prior to the 2008 financial crisis, is suing Standard & Poor’s in the Cayman Islands for US$5.14 billion in losses allegedly caused by the credit rating agency’s “flawed” ratings of eight collateralised debt obligations (CDOs).
Fortis Cayman purchased the interests in super-senior tranches in the CDOs between 2006 and 2007. They were later transferred first to Fortis Park Lane in Ireland in 2008 and then to Royal Park in 2009.
Royal Park, a Brussels-based special purpose company, sold its entire credit portfolio in 2013 and now exists mainly to prosecute mortgage-backed security litigation claims against financial institutions in the United States. Its shareholders are Ageas Insurance, formerly Fortis Holding, the government of Belgium and French bank BNP Paribas.
In the wake of the 2008 crisis, troubled Fortis Bank received bailouts from the Belgian and Dutch governments and was broken up by merging the Dutch part with ABN Amro and selling the remaining banking operations to BNP Paribas.
The lawsuit filed on 10 Feb. in the Cayman Islands Grand Court claims the CDO Evaluator model used by S&P to assign ratings to CDOs contained material flaws. These flaws included unreasonable, unsupported and inaccurate correlation assumptions, which resulted in higher ratings of the structured financial products.
Royal Park Investments argues that had the flaws not been present, the CDOs would have been rated well below the AAA rating they received.
The plaintiff claims Fortis Cayman relied on the ratings published by S&P and would otherwise not have bought the securities.
Royal Park Investments asserts: “S&P assigned the ratings to the securities knowing that the flaws resulted in the CDO Evaluator producing unreliable ratings; Alternatively, S&P had no belief that the Ratings were true; Further alternatively, S&P acted recklessly as to the truth of the Ratings.”
As a result of the alleged “deceit”, the suit claims damages of US$5,144,383,870 and interest.
One of many cases against rating agencies
Credit rating agencies have faced a barrage of litigation over inflated ratings in the aftermath of the 2008 financial crisis.
Credit rating agencies have been frequently accused of assigning ratings to risky mortgage-backed and structured securities that were too high, in order to win new business.
Critics have argued that their actions sparked demand from trusting investors and contributed to the 2008 global financial crisis when it turned out that the ratings did not accurately reflect the risk inherent in the structured financial products.
Without admission of wrongdoing, Moody’s and S&P settled two lawsuits in 2013 that sought to hold them accountable for misleading investors. The terms of the settlements were not disclosed.
In the same year, S&P faced a $5 billion civil fraud suit brought by the US Justice Department, which claimed the rating agency had engaged in a scheme to defraud investors in residential mortgage-backed securities and collateralised debt obligations.
The case was settled for $1.375 billion in 2015. Under the settlement, S&P admitted the company’s leadership had ignored internal warnings by senior analysts that top-rated financial products were underperforming and refused to downgrade them.
While courts have in some cases rejected the defence that rating agencies were merely offering opinions and that those opinions were protected speech, they have also dismissed cases against them because the thresholds for liability are high.
In many cases, plaintiffs were unable to prove the rating agencies did not believe in the accuracy of their ratings, knowingly concealed any flaws or that a rating was provably false.
Related Videos
