“Small Claims Court” Lawsuits Could Cost Wall Street’s Credit Rating Agencies Billions

BY RICHARD LAWLESS

This is truly a story about David verses Goliath. Over the past four toย five months, two hundred and forty small claims court lawsuits have beenย filed with the California Superior Court. The plaintiffs claim that theย executives at the three largest credit rating agencies, Moody’s, Fitchย and S&P engaged in securities fraud, mail fraud, wire fraud, bribery,ย extortion and racketeering when they issued credit ratings on tens ofย billions of dollars in Puerto Rico municipal bonds. The plaintiffs areย seeking to recover two thousand five hundred dollars.

Unbelievably, the credit rating agencies decided to dispute the claimsย rather then reach a settlement. I say “unbelievably” because of whatย you are about to read next.

The credit rating agencies dispute resulted in an evidentiary hearing onย November 15, 2019. The defendants claimed the court did not have jurisdiction in these cases. The court denied that motion andย reaffirmed jurisdiction over these disputes. The defendants claimed oneย of the plaintiffs did not have legal standing to participate in aย lawsuit. That motion was also denied by the court. The court asked theย plaintiffs to submit evidence justifying these lawsuits.

The following was submitted to the court: A copy of a forensicย accounting audit on the bonds reflecting the fact that the municipalย agencies were already bankrupt prior to the issuance of these bonds.ย Sworn testimony from municipal executives claiming that the creditย rating agencies knew them to be bankrupt but would issue good creditย ratings in exchange for hefty fees.ย Sworn testimony that the lead auditor for the municipal agencies statingย the agencies have been technically bankrupt since 2010.ย Documents confirming the existence of recorded telephone conversationsย reflecting payoffs to Department of Justice personnel to prevent anyย investigations or prosecutions.

The court determined that sufficient evidence exists to move forwardย with these small claim cases. The evidence was shared with theย Riverside District Attorney, Michael Hestrin who then forwarded theย evidence on to the California, Attorney General, Xavier Becerra.

One has to ask? What were the credit rating agency executives thinking?ย Now they are looking at the possibility of billion of dollars in finesย from the Securities and Exchange Commission and the real possibility ofย criminal charges.

The plaintiffs have recently requested that the court issue subpoenasย forcing the appearance of the defendants in these small claims courtย hearings. There is no doubt that there will be law enforcementย personnel in the courtroom eagerly listening to the defendant’sย testimony. Stay tuned this story can only get better. Honestly, youย can’t make this stuff up!

Richard Lawless is an investigative journalist and one of the plaintiffsย involved in these 240 lawsuits. Lawless has written articles onย financial fraud that have appeared with major media outlets all over theย world. He has 30 years of experience as a senior and executive bankerย for companies like Wells Fargo Bank and Home Savings and has served on aย number of corporate boards.

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