Dismissal of O.C. Lawsuit Denied

Ruling on an issue seldom brought before the courts, a federal judge has given Orange County permission to proceed with a $500-million lawsuit alleging that stellar bond ratings by Wall Street’s largest rating agency helped cause the county’s financial collapse in 1994.

The ruling by U.S. Dist. Judge Gary L. Taylor rejected an argument by Standard & Poor’s that the county’s suit should be dismissed on 1st Amendment grounds. Standard & Poor’s, which is owned by McGraw Hill, argued that as a publisher of financial information it was immune from such suits.

The county sued Standard & Poor’s and several other professional firms last June in a bid to recoup $1.64 billion that the county’s investment pool lost on risky securities, many of which were bought with the proceeds from county bond sales.

The suit against Standard & Poor’s alleges professional negligence as well as breach of contract, and contends that rating agency officials should have discovered and drawn attention to the risky nature of many of the investment pool’s holdings.

Instead, the rating agency made public assurances that the county’s investment pool was sound, and that the county would be able to pay off bonds sold for the sole purpose of raising money for securities trades.

Standard & Poor’s and other such agencies bestow ratings on bonds sold on Wall Street. The ratings are akin to an individual’s credit rating, and the difference between a good or a bad bond rating can mean millions in borrowing costs.

In trying to get Orange County’s damage suit dismissed, Standard & Poor’s attorneys argued that their ratings are opinion and therefore protected by the 1st Amendment. As a result, they are rarely sued successfully.

But the county’s lawyers countered that their suit arose out of services Standard & Poor’s provided as a financial analyst paid by the county--not as a ratings publisher.

When the issue came before U.S. Bankruptcy Judge John E. Ryan last year, he dismissed part of the county’s suit but kept intact claims for breach of contract and professional negligence. Standard & Poor’s appealed, asking Taylor to dismiss the remaining claims.

In a 22-page ruling, Taylor upheld the county’s right to sue for breach of contract--its central claim. The judge tossed out the section of the suit alleging professional negligence but said the county had 20 days to refile that part of the suit if it could show a “separation between S&P;’s conduct as the county’s financial advisor and its expression as a financial publisher.”

Michael Swartz, an attorney for the county, said the county would satisfy the judge’s concerns.