The California Public Employees' Retirement System (CalPERS) has settled with Moody's for a record US$130 million for its erroneous ratings of structured investment vehicles prior to the Global Financial Crisis.
The lawsuit tops CalPERS' US$125 million settlement with Standard & Poor's last year, bringing total recovery to US$255 million. CalPERS said the case is considered a record because it's the largest known recovery from Moody's and S&P in a private lawsuit for civil damages.
CalPERS sued Moody's and other rating agencies in 2009 after the pension fund sustained losses from investments in three structured investment vehicles that relied on the liquidity of assets that turned out to be illiquid - such as subprime Residential Mortgage-Backed Securitie (RMBS), Collateralised Debt Obligations (CDOs) and other asset-backed securities.
In the lawsuit CalPERS alleged Moody's made "negligent misrepresentations" by assigning the investments their highest credit rating. This caused significant losses as the market for structured finance securities collapsed in late 2007.
The case also established through a landmark appellate court decision that rating agencies can be liable for negligent misrepresentations under California law for their ratings of privately-placed securities.
General Counsel for CalPERS, Matthew Jacobs, said the settlement "resolves our lawsuit against Moody's and restores money that belongs to our members and employers."
"We are eager to put this money back to work to help ensure the long-term sustainability of the fund," Jacobs said.
"This should serve as a cautionary reminder to all investors who rely on rating agencies to guide their investments."
CalPERS is the largest defined-benefit public pension in the US. Its total fund market value stands at about US$285 billion.
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