Judge Scheindlin continues to define the law for rating agencies, finding that they don’t have immunity from fraud claims on the ground that their ratings are merely their own opinions, not statements of fact. That’s pretty significant for lawsuits arising out of the subprime mortgage meltdown. Here’s how she nicely sums up the essence of a viable fraud claim against a rating agency in King’s County v. IKB Deutsche Industriebank, which involved a rating for a structured investment vehicle made up of bad mortgages: “To sustain a fraud claim against each rating agency, then, plaintiffs must provide evidence that the rating agency issued a rating that it knew was unsupported by facts or analysis – that the rating agency did the equivalent of issuing a restaurant review despite never having dined at the restaurant.”

In denying motions by the rating agencies for summary judgment, Judge Scheindlin addresses each of the elements of a fraud claim against a rating agency. First, she finds that when “a rating agency issues a rating, it is not merely a statement of that agency’s unsupported belief, but rather a statement that the rating agency has … reached a fact based conclusion as to creditworthiness.” Next she finds that a jury can infer scienter, or intent to defraud investors, based on evidence that an agency issued a rating it knew was inaccurate, and that a plaintiff’s testimony is enough on its own to establish “reliance” on the rating. She also finds that reliance on the rating agencies can be reasonable where the agencies had access to information not available to investors, and the investments rated were “the most opaque structured credit vehicles and transactions on the market.”

King’s County makes much reference to Judge Scheindlin’s much publicized 2012 decision in Abu Dhabi Commercial Bank v.Morgan Stanley. Together, they show that conclusions that the rating agencies were going to be able to stroll away from the 2007/2008 subprime meltdown were premature. As well, of course, they are a marker for allocating responsibility in future meltdowns.

UPDATE: The Department of Justice announcded the filing of a civil fraud suit against Standard and Poor’s on Feb. 4, venued in California. The case arises from ratings provided in connection with the subprime meltdown. Here’s an early news report, and here’s the DOJ Complaint.