California Public Employees' Retirement System v. Moody's Investors Service, Inc.

Facts

P filed a complaint against Ds asserting causes of action for negligent misrepresentation and negligent interference with prospective economic advantage. P challenged the veracity of D's assignment of highly favorable credit ratings to three structured investment vehicles. All of them ultimately collapsed, causing billions of dollars in losses to P and other investors. P invested approximately $1.3 billion of its assets in medium-term notes, and commercial paper issued by these SIVs after Ds assigned the debt their highest “AAA” ratings. Shortly thereafter When the SIVs subsequently entered bankruptcy or receivership in 2007 or 2008, P lost “hundreds of millions, and perhaps more than $1 billion.” A SIV is a type of special-purpose investment entity usually formed by a major commercial bank or investment management company that has but one business activity-to wit, issuing debt. The assets which make up SIVs are typically represented in offering materials to be mostly highly rated asset-backed securities from many sectors: financial, auto loans, student loans, credit card loans, home equity loans, residential mortgage-backed securities (‘RMBS’), commercial mortgage-backed securities, and other structured finance products like collateralized debt obligations (‘CDOs’) and collateralized loan obligations (‘CLOs’).” Ds are the institutions that provide credit ratings for the notes issued by the SIVs. D conducts detailed research and risk analysis with respect to the SIV notes. Once a rating is given, it is published in the SIV's offering materials made available to potential investors. D's Web sites and articles, as well as the offering materials also carry cautionary language informing readers that, among other things, ratings are the subjective views of the assigning agency rather than statements of fact; are not a recommendation to buy, sell or hold a particular security; and may be subject to revision, suspension or withdrawal at any time. Readers are further cautioned to undertake independent study and evaluation of the rated security before deciding whether to invest. The $1.3 billion in commercial paper and medium-term notes that P purchased from the SIVs were all rated AAA or the equivalent by one or more of the Rating Agencies. P claims the ratings were negligent misrepresentations. P contends Ds used flawed and incomplete methodologies that failed to adequately capture market risk, with the result that the SIV ratings were inflated. Without the high ratings indicating stable financial returns, the SIVs would not have attracted buyers. Had Ds not given their highest ratings the SIVs, P would not have purchased their debt issues and suffered the significant investment losses when, in 2007 and 2008, the SIVs suffered a series of downgrades and were eventually forced to wind down. Ds filed the special motion to strike under the anti-SLAPP statute. Ds contends P's suit is based on activities in furtherance of their right of free speech, and that there was no probability P could prevail on the merits. The court found that the negligent misrepresentation claim fell within the scope of the anti-SLAPP statute but nonetheless denied the special motion to strike after finding P had succeeded in proving a probability of success on the merits. Ds appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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