The class-action settlement is likely one of the largest of its kind achieved pre-trial in Australia
Top litigators from Squire Patton Boggs have helped secure a major settlement in a long-running class-action lawsuit, which could have global implications.
Last month, Fitch paid $27m to settle the Mid-Coast Council v Fitch Ratings case. The settlement resulted in the recovery of about 95% of the losses incurred by claimants in their purchase of synthetic collateralised debt obligations (SCDOs), which were rated by Fitch.
Squire Patton Boggs partner Amanda Banton, who heads the global firm’s restructuring and insolvency practice group in the Asia-Pacific region, represented the class. The firm said that the latest settlement is likely to be, in percentage terms, one of the largest of its kind achieved pre-trial in Australia.
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The case filed in 2014 alleged Fitch had engaged in misleading and deceptive conduct and was negligent in giving AAA and AA ratings to certain CDOs known as “Palladin AAA” and “Palladin AA.” Fitch denied the allegations and made no admissions as part of the settlement, which was reached in July.
Fitch argued that the case was filed outside the limitation period applicable to the claim. As a result, the claims were time-barred, it said.
Last year, the court allowed the addition of deceit in the claim after the discovery of a hidden mathematical table within Fitch’s ratings model for financial products that appears to inflate ratings given by Fitch, Squire Patton Boggs said. No previous proceeding or investigation into Fitch appears to have discovered the hidden table, the firm said.
“The Applicants alleged that the hidden table contained ‘probabilities of default’ figures that were set manually by Fitch; that Fitch had no reasonable basis or empirical data to support those figures; and allowed the products to be assigned inflated credit ratings. Probabilities of default are used by rating agencies to determine which products are assigned what rating. Generally speaking, the higher the probability of default, the lower the rating,” the firm said.
Squire Patton Boggs said that that if proven, the allegation of fraud would have defeated Fitch’s limitation defence, as the limitation period for fraud begins to run six years from the date that the fraud could reasonably have been discovered. The hidden table was discovered in or around March 2018, which has global implications, the firm said.
“This extension to the limitation period following discovery of the alleged hidden table has worldwide implications. Claimants likely now have additional time in which to bring proceedings against Fitch for losses on their pre-crisis-era credit ratings of SCDOs which were rated using certain iterations of Fitch’s VECTOR model,” Squire Patton Boggs said.
Banton said that the firm’s clients invested in the Palladin SCDOs relying on the credit rating assigned by a globally-recognised rating agency. The firm said that the members of the class included major investors in financial products.
“Following the proceedings brought against Standard & Poor’s and Moody’s Investor Service by the Department of Justice in the United States, it appeared that Fitch was the most conservative of the well-known rating agencies, having escaped prosecution. In reality, the discovery of the hidden table within Fitch’s pre-crisis-era ratings model uncovered may impact all products rated between 2006 and 2008, as it is likely those investors may also be able to prove a fraud,” Banton said. “These proceedings open the door for others who suffered loss to seek recovery well beyond the standard six year deadline on Fitch-rated products. In the relevant period, at least $139bn of Fitch-rated CDO products were downgraded and many products had substantial losses.”
In the aftermath of the global financial crisis, ratings agencies were heavily criticised for their high ratings of securities that later flopped. They were also sued, including by the US government. Some of the agencies have paid billions to settle similar suits.
In 2015, S&P paid US$1.5bn to settle a collection of lawsuits brought against it by the US Department of Justice for its ratings on mortgage securities that soured before the global financial crisis. In 2017, Moody’s settled a similar care for US$864m. Last year, S&P settled a derivatives-rating lawsuit in Australia, the last major litigation it faced over its ratings of CDOs. The settlement sum was confidential.
For more than a decade, Banton, along with her Squire Patton Boggs team, has led numerous class actions against investment banks, including Lehman Bros and ABN Amro, and international ratings agencies, including Standard & Poor’s (S&P) and Fitch, in relation to their AAA rating of various securities.