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Liquidators of failed Bear Stearns funds sue rating agencies

A view shows the Standard & Poor's building in New York's financial district February 5, 2013. REUTERS/Brendan McDermid
A view shows the Standard & Poor's building in New York's financial district February 5, 2013. REUTERS/Brendan McDermid

By Karen Freifeld

NEW YORK (Reuters) - The liquidators of two offshore Bear Stearns hedge funds have filed a $1.12 billion lawsuit accusing the major U.S. credit rating agencies of fraudulently issuing inflated ratings for securities that the funds owned.

The lawsuit against McGraw Hill Financial Inc's Standard & Poor's, Moody's Corp's Moody's Investors Service and Fimalac SA's Fitch Ratings was filed on Tuesday in a New York state court.

The case was brought by liquidators of Bear Stearns High-Grade Structured Credit Strategies (Overseas) Ltd and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd.

The two funds claimed to have suffered losses through their ties to the Bear Stearns High Grade Structured Credit Strategies Ltd and Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Ltd, which both went bankrupt in July 2007.

Those funds had been managed by former Bear Stearns managers Ralph Cioffi and Matthew Tannin, who were acquitted in 2009 of federal criminal charges they misled investors. Last year, the men agreed to pay about $1 million to settle a related U.S. Securities and Exchange Commission civil case.

Tuesday's case was filed one day after a federal judge in California made a tentative ruling allowing the U.S. Justice Department to pursue its $5 billion civil lawsuit against S&P alleging the company defrauded investors by inflating ratings.

They accused the rating agencies of misrepresenting their independence, the quality of their models and the timeliness of their ratings for collateralized debt obligations and residential mortgage-backed securities.

The result was that the ratings were tainted for the purportedly "high-grade" securities they bought, resulting in the $1.12 billion of losses. The liquidators are also seeking punitive damages.

S&P spokesman Ed Sweeney said in an email that the allegations are "without merit and we will defend ourselves vigorously." Moody's and Fitch did not immediately return calls for a comment.

"The government case has opened up the ability of big institutional investors to bring these common-law fraud cases," said Joel Laitman, a partner in Cohen Milstein Sellers & Toll, who is not involved in the lawsuit.

In Monday's ruling in the federal government's case, U.S. District Judge David Carter in Santa, Ana, California, said the government had sufficiently alleged that S&P intended to deceive investors with ratings that were objectively and subjectively false. Carter plans to issue a final ruling by July 15.

The case is Varga et al v. McGraw Hill Financial Inc et al, New York State Supreme Court, New York County, No. 652410/2013.

(Reporting By Karen Freifeld; Additional reporting by Jonathan Stempel; Editing by Kenneth Barry)

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