Court Deals Blow to O.C.’s Bankruptcy Suit Against S
An appeals court has refused to lift a major legal hurdle to Orange County as it pursues a $3-billion lawsuit blaming the bond rating agency Standard & Poor’s for failing to warn of the dangerous investments that plunged the county into bankruptcy in 1994.
In a decision Thursday, the 9th U.S. Circuit Court of Appeals refused to review federal Judge Gary L. Taylor’s ruling that S&P;’s work while rating the county’s ability to repay its bondholders is covered by the 1st Amendment. The ruling greatly increases the county’s burden of proof.
The agency gave its highest ratings to about $2 billion in Orange County debt issued in 1993 and 1994. The county contends that proper investigation and warnings by S&P; would have kept it from issuing the bonds and would have allowed it to stop then-county Treasurer Robert L. Citron from making the huge bets on lower interest rates that led to the debacle.
The county had appealed after Taylor ruled that the county must show more than negligence to recover damages. Taylor said the county must prove S&P; knowingly published false statements or recklessly disregarded the truth--a lofty “actual malice” standard imposed to encourage aggressive news reports about issues of high public interest.
Attorneys for the county had asked the appeals court to strike down Taylor’s ruling before trial, but the court refused. S&P; learned of the decision Monday, said Kenneth Vittor, general counsel of the rating agency’s parent company, the McGraw Hill Cos. Inc.
“It’s a very significant defeat for the county,” Vittor said.
Taylor also decided that the county cannot seek damages relating to about $1 billion in 1993 bond debt that S&P; rated, ruling that actual malice can’t be proved for its actions that year.
He also determined that any damages awarded the county must be offset by the $800 million in damages it already has recovered by suing its former brokers, chiefly Merrill Lynch & Co., and other professional advisors.
J. Michael Hennigan, an attorney for the county, said he was disappointed at failing to overturn Taylor’s rulings but added: “It doesn’t change anything. From our perspective the case goes on--as an actual malice case for 1994.” Even given Taylor’s rulings, the county still could recover as much as $500 million in damages, interest and costs, Hennigan estimated.
The county lawsuit accuses S&P; of breach of contract and professional negligence. It also hopes to add a charge borrowed from a related lawsuit filed against Merrill Lynch.
That lawsuit, filed by some of the other 200 government entities that lost money when the treasury collapsed in December 1994, accuses Merrill Lynch of aiding and abetting Citron’s recklessness.
No trial date has been set, and a significant amount of pretrial investigation and motions remains, Vittor said.
