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In re Std. & Poor's Rating Agency Litig.

United States District Court, S.D. New York

June 3, 2014

IN RE: STANDARD & POOR'S RATING AGENCY LITIGATION. This Document Relates to All Actions

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For State of Maine, Plaintiff: LINDA CONTI, ASSISTANT ATTORNEY GENERAL, Augusta, ME.

For Dustin Mcdaniel, Attorney General, State of Arkansas, ex rel., Plaintiff: Kevin Wells, PRO HAC VICE, James DePriest, Arkansas Attorney General's Office, Little Rock, AR.

For Arizona, State of named as: State of Arizona, ex rel. Thomas C. Horne, Attorney General ex rel Thomas C Horne, Plaintiff: Brad Kevin Keogh, PRO HAC VICE, Office of the Attorney General - Phoenix, Phoenix, AZ; Nancy M Bonnell, Susan Veronica Myers, Office of the Attorney General, Phoenix, AZ.

For John W. Suthers, State of Colorado, ex rel, Plaintiff: Jennifer Miner Dethmers, PRO HAC VICE, State of Colorado Attorney General's Office, Denver, CO.

For District of Columbia, Plaintiff: Grant G. Moy, Jr., LEAD ATTORNEY, Office of The Attorney General For The District of Columbia, Washington, DC; Bennett C. Rushkoff, PRO HAC VICE, Office of The Attorney General For The District of Columbia, Washington, DC.

For State of Mississippi ex rel, Jim Hood, Attorney General, Plaintiff: Betsy Alexandra Miller - PHV, PRO HAC VICE, COHEN, MILSTEIN, SELLERS & TOLL, PLLC, Washington, DC; Blake Anthony Tyler, STOVER GADOW & TYLER, Jackson, MS; Geoffrey C. Morgan, George W. Neville, PRO HAC VICE, Mary Jo Woods, Meredith McCollum Aldridge, Mississippi Attorney General's Office, Jackson, MS; Kit A. Pierson, PRO HAC VICE, Cohen Milstein Sellers & Toll PLLC (DC), Washington, DC; Mimi Y. Liu, PRO HAC VICE, Cohen Milstein Hausfeld & Toll PLLC, Washington, DC; Vaterria McQuitter Martin, VATERRIA M. MARTIN, ATTORNEY AT LAW, PLLC, Jackson, MS.

For Commonwealth of Pennsylvania by Attorney General Kathleen G. Kane, Plaintiff: John M. Abel, PRO HAC VICE, PA Office of Attorney General, Harrisburg, PA.

For State of Washington, Plaintiff: Benjamin J. Roesch, Attorney General of Washington, Seattle, WA; Shannon E Smith, PRO HAC VICE, Washington Attorney General, Seattle, WA.

For Alan Wilson, in his official capacity as Attorney General and as Securities Commissioner for the State of South Carolina; State of South Carolina, ex rel., Plaintiff: Alan Wilson, Clyde Havird Jones, Jr, Robert Dewayne Cook, SC Attorney General's Office, Columbia, SC; Donald C Coggins, Jr, John Belton White, Jr, Harrison White Smith and Coggins, Spartanburg, SC; Jared Quante Libet, Office of Attorney General (SC), Columbia, SC; John S Simmons, John S Simmons Law Offices, Columbia, SC.

For State of Delaware, Plaintiff: Gregory C. Strong, PRO HAC VICE, Jillian Amy Lazar, Delaware Department of Justice, Wilmington, DE; Jillian G. Remming, PRO HAC VICE, Department of Justice, Wilmington, DE.

For State of Missouri, Plaintiff: B. Joyce Yeager, Joseph P Bindbeutel, Missouri Attorney General's Office-JC, Jefferson City, MO.

For Chris Koster, The Commissioner of Securities, Plaintiffs: Sean Alan Smith, PRO HAC VICE, Missouri Attorney General's Office-JC, Jefferson City, MO.

For State of Idaho, through Attorney General Lawrence Wasden, Plaintiff: Jane E Hochberg, State of Idaho, Office of the Attorney General, Consumer Protection Unit, Boise, ID; Oscar S Klaas, Idaho Attorney General's Office, Consumer Protection Division, Boise, ID; Oscar S. Klaas, Idaho Attorney General, Cosumer Protection Division, Boise, AD.

For State of North Carolina, ex. rel. Roy Cooper, Attorney General, Plaintiff: Berkley Carrington Skinner Iv, North American Reinsurance Corporation, New York, NY; Jennifer L. Epperson, Philip A. Lehman, N. C. Dept. of Justice, Raleigh, NC; Jennifer T Harrod, Nc Attorney General, Raleigh, NC; Phillip Kevin Woods, State of North Carolina Department of Justice, Raleigh, NC.

For The Mcgraw-Hill Companies, Inc., Plaintiff: Danielle M Shelton, Holly M Logan, Mark E Weinhardt, Todd M. Lantz, WEINHARDT & LOGAN PC, Des Moines, IA; Floyd Abrams, Cahill Gordon & Reindel LLP, New York, NY; Jason M Hall, PRO HAC VICE, CAHILL GORDON & REINDEL, New York, NY; Michael J. King, William Kyle Carpenter, Woolf, McClane, Bright, Allen & Carpenter, PLLC, Knoxville, TN; Mihir Kshirsagar, Cahill Gordon & Reindel LLP, New York, NY.

For State of Iowa, ex rel Thomas J. Miller Attorney General, Plaintiff: Jeffrey Scott Thompson, Iowa Attorney General's Office, Des Moines, IA; Steven M St. Clair, ATTORNEY GENERAL OF IOWA, Des Moines, IA; Steven Marc St. Clair, Iowa Department of Justice, Des Moines, IA.

For State of Indiana, ex rel. Chris Naylor, Indiana Securities Commissioner, Plaintiff: Justin G. Hazlett, OFFICE OF THE ATTORNEY GENERAL, Indianapolis, IN; Lisa S. Wolf, PRO HAC VICE, Office of The Indiana Attorney General, Indianapolis, IN.

Attorney Berkley Carrington Skinner, Plaintiff, Pro se, Raleigh, NC.

For John J. Hoffman, Acting Attorney General of the State of New Jersey, Plaintiff: Brian Francis McDonough, LEAD ATTORNEY, New Jersey Division of Law, Newark, NJ; Edward James Mullins, III, Division of Law, Newark, NJ.

For Eric T. Kanefsky, Plaintiff: Brian Francis McDonough, LEAD ATTORNEY, New Jersey Division of Law, Newark, NJ; Edward James Mullins, III, Division of Law, Newark, NJ.

For Mcgraw-Hill Companies Inc, Defendant: Errol Ismail, Shilpa Narayan, PRO HAC VICE, Adam Nelson Zurofsky, Floyd Abrams, Jason Hall, Peter J Linken, Samantha Mary Walsh, Susan Buckley, Cahill Gordon & Reindel LLP, New York, NY; Brian Neil Hoffman, Randall J. Fons, Morrison & Foerster, LLP-Denver, Denver, CO; Charles Christian Sipos, David J. Burman, PERKINS COIE (SEA), Seattle, WA; Christine Salmi, PERKINS COIE, Boise, ID; FRED KRUTZ, III, John Chase Bryan, Mandie B. Robinson, FORMAN, PERRY, WATKINS, KRUTZ & TARDY, Jackson, MS; Holly L. Cline, Jack M. Stover, Jayson R. Wolfgang, Buchanan Ingersoll & Rooney, PC, Harrisburg, PA; Jan L. Budman, II, Buchanan Ingersoll & Rooney, Harrisburg, PA; Kathy Silberthau Strom, CAHILL GORDON & REINDEL LLP, Washington, DC; Kevin A. Crass, Martin A. Kasten, Friday, Eldredge & Clark, LLP, Little Rock, AR; Krista Friedrich, PRO HAC VICE, CAHILL GORDON & REINDEL, New York, NY; Mary Bridget Minder, PRO HAC VICE, Lee David Stein, Perkins Coie LLP, Phoenix, AZ; MICHAEL S. SMITH, PRETI, FLAHERTY, BELIVEAU, & PACHIOS, LLP, Portland, ME; Richard C Boardman, PRO HAC VICE, Perkins Coie LLP, Boise, ID; Richard R. Wier, Jr., Shannon Larner Brainard, Marshall, Dennehey, Warner, Coleman & Goggin, Wilmington, DE; S. Penny Windle - PHV, Whitney M. Smith - PHV, PRO HAC VICE, CAHILL, GORDON & REINDEL, LLP, New York, NY; Sigmund D. Schutz, PRO HAC VICE, Preti Flaherty Beliveau & Pachios LLP, Portland, ME.

For Standard And Poor's Financial Services LLC, Defendant: Adam Karl Doerr, Robert W. Fuller, Robinson, Bradshaw & Hinson, P.A., Charlotte, NC; Adam Nelson Zurofsky, Floyd Abrams, Jason Hall, Mihir Kshirsagar, Peter J Linken, Susan Buckley, Cahill Gordon & Reindel LLP, New York, NY; Benjamin M Johnston, Shook, Hardy & Bacon, LLP-KCMO, Kansas City, MO; Brian Neil Hoffman, Randall J. Fons, Morrison & Foerster, LLP-Denver, Denver, CO; Charles Christian Sipos, David J. Burman, PERKINS COIE (SEA), Seattle, WA; Christine Salmi, PERKINS COIE, Boise, ID; Danielle M Shelton, Mark E Weinhardt, Todd M. Lantz, WEINHARDT & LOGAN PC, Des Moines, IA; David Coleman Kimball, Stephen M Cox, Robinson Bradshaw and Hinson, Rock Hill, SC; E. Ashley Paynter, BINGHAM GREENEBAUM DOLL LLP, Indianapolis, IN; Errol Ismail, Shilpa Narayan, PRO HAC VICE, Cahill Gordon & Reindel LLP, New York, NY; FRED KRUTZ, III, John Chase Bryan, Mandie B. Robinson, FORMAN, PERRY, WATKINS, KRUTZ & TARDY, Jackson, MS; Holly L. Cline, Jack M. Stover, Buchanan Ingersoll & Rooney PC, Harrisburg, PA; James Dickson Phillips, III, Robinson Bradshaw & Hinson, P.A., Chapel Hill, NC; Jan L. Budman, II, Jayson R. Wolfgang, Buchanan Ingersoll & Rooney, Harrisburg, PA; Joseph M. Rebein, Shook, Hardy & Bacon, LLP (MO), Kansas City, MO; Kathy Silberthau Strom, CAHILL GORDON & REINDEL LLP, Washington, DC; Kevin A. Crass, Martin A. Kasten, Friday, Eldredge & Clark, LLP, Little Rock, AR; Krista Friedrich, PRO HAC VICE, CAHILL GORDON & REINDEL; New York, NY; Lee David Stein, Perkins Coie LLP, Phoenix, AZ; Mary Bridget Minder, PRO HAC VICE, Perkins Coie LLP, Phoenix, AZ; Michael J. King, William Kyle Carpenter, Woolf, McClane, Bright, Allen & Carpenter, PLLC, Knoxville, TN; MICHAEL S. SMITH, PRETI, FLAHERTY, BELIVEAU, & PACHIOS, LLP, Portland, ME; Richard C Boardman, PRO HAC VICE, Perkins Coie LLP, Boise, ID; Richard R. Wier, Jr., Shannon Larner Brainard, Marshall, Dennehey, Warner, Coleman & Goggin, Wilmington, DE; Sigmund D. Schutz, PRO HAC VICE, Preti Flaherty Beliveau & Pachios LLP, Portland, ME; Wayne C. Turner, McTurnan & Turner, Indianapolis, IN.

For Moody's Corporation, Moody's Investors Service, Inc., Defendants: C. Michael Ellingburg, DANIEL, COKER, HORTON & BELL, Jackson, MS; Glenn Charles Edwards, Satterlee Stephens Burke & Burke LLP, New York, NY; James J. Coster - PHV, James Doty - PHV, Joshua M. Rubins - PHV, PRO HAC VICE, SATTERLEE, STEPHENS, BURKE & BURKE, LLP, New York, NY.

For Mcgraw-Hill Companies, Inc., The, Defendant: Adam Karl Doerr, Robert W. Fuller, Robinson, Bradshaw & Hinson, P.A., Charlotte, NC; Adam Nelson Zurofsky, Floyd Abrams, Jason Hall, Peter J Linken, Susan Buckley, Cahill Gordon & Reindel LLP, New York, NY; Benjamin M Johnston, Shook, Hardy & Bacon, LLP-KCMO, Kansas City, MO; David Coleman Kimball, Stephen M Cox, Robinson Bradshaw and Hinson, Rock Hill, SC; E. Ashley Paynter, BINGHAM GREENEBAUM DOLL LLP, Indianapolis, IN; James Dickson Phillips, III, Robinson Bradshaw & Hinson, P.A., Chapel Hill, NC; Joseph M. Rebein, Shook, Hardy & Bacon, LLP (MO), Kansas City, MO; Wayne C. Turner, McTurnan & Turner, Indianapolis, IN; William Kyle Carpenter, Woolf, McClane, Bright, Allen & Carpenter, PLLC; Knoxville, TN.

For Robert E. Cooper, Jr., in his official capacity as the Attorney General of the State of Tennessee, State of Tennessee, EX Rel. Robert E. Cooper, Jr., Attorney General And Reporter, Defendants: Olha N.M. Rybakoff, LEAD ATTORNEY, Jeffrey L. Hill, Tennessee Attorney General's Office, Nashville, TN; Jennifer Elizabeth Peacock, PRO HAC VICE, Office of The Tennessee Attorney General, Consumer Advocate And Protection Division, Nashville, TN.

For Mcgraw Hill Financial, Inc., Standard & Poor's Financial Services, LLC, Defendants: Brian Patrick Barrett, Cahill Gordon & Reindel LLP, New York, NY.

For United States of America, Interested Party: Barbara Murcier Bowens, U.S. Attorneys Office, Columbia, SC.

For United States of America, Amicus: Anoiel Khorshid, George Sargent Cardona, U.S. Attorney's Office -- Central District California, Los Angeles, CA; Leon Warren Weidman, Richard E Robinson, U.S. Attorneys Office - Los Angeles - Los Angeles St., Los Angeles, CA.

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OPINION AND ORDER

JESSE M. FURMAN, United States District Judge.

This multidistrict litigation (" MDL" ) proceeding, comprised of nineteen cases, pits States and the District of Columbia (collectively, the " States" ) against a national credit-rating agency, McGraw Hill Financial, Inc. (formerly the McGraw-Hill Companies, Inc.) and its subsidiary, Standard & Poor's Financial Services LLC (collectively, " S& P" ). (As discussed below, one of the States -- Mississippi -- also names Moody's Corporation and its subsidiary Moody's Investor's Service, Inc. (together, " Moody's" ) as Defendants.) In seventeen of the cases (the " State Cases" ), the States brought suit in their own courts to enforce state consumer-protection and deceptive trade practice laws, only to see S& P (and, in Mississippi, Moody's) remove the cases to federal court. The gravamen

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of the States' Complaints in those cases is that S& P (and, in the case of Mississippi, Moody's) misled the States' citizens in representing that bond ratings were objective and independent rather than influenced by undisclosed and unmanaged conflicts of interest. In the remaining two cases (the " Declaratory Judgment Cases" ), S& P is on the plaintiff's side of the " v." suing South Carolina and Tennessee. S& P filed those lawsuits just before the two States filed their civil enforcement actions in state court (actions that were subsequently removed and are among the State Cases that form part of this MDL). S& P principally seeks (1) declarations that the relief requested by South Carolina and Tennessee in 06/03/2014 their civil enforcement actions would be unconstitutional or otherwise violate federal law; and (2) injunctions against those two States' civil enforcement actions.

At this stage of these cases, the merits of the States' and S& P's claims are not at issue. Instead, the question is where the parties' disputes should be resolved -- namely, whether they should be heard in federal court or in the relevant state courts. The States do not -- and, in light of the Credit Rating Agency Reform Act of 2006, Pub. L. No. 109-291, 120 Stat. 1327 (2006) (" CRARA" ), cannot -- dispute that there is a strong federal interest in the regulation of national credit-rating agencies, including S& P and Moody's (the two largest credit-rating agencies in the country). Instead, relying on the well-established proposition that federal courts are courts of limited jurisdiction, and citing the long history of States seeking to enforce their own consumer-protection and deceptive trade practices laws in their own courts, the States argue that their disputes with S& P and Moody's should be litigated in the state courts.

By contrast, the rating agencies contend that the disputes should be litigated in federal court. Specifically, S& P contends that all of the State Cases present substantial federal questions giving rise to jurisdiction under Title 28, United States Code, Section 1331. With respect to the Mississippi case, S& P and Moody's jointly argue in the alternative that jurisdiction is proper pursuant to either the " mass action" provisions of the Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4 (2005) (" CAFA" ), or the general diversity statute, Title 28, United States Code, Section 1332(a). Finally, although the parties do not dispute the existence of federal jurisdiction with respect to the Declaratory Judgment Cases, South Carolina and Tennessee ask the Court to dismiss those cases in deference to their state civil enforcement actions.

Now pending are two joint motions raising these issues, addressed in three sets of briefs. First, all seventeen States involved in the MDL jointly move, pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure, to remand the State Cases back to state court on the ground that, as pleaded, they arise solely under state law, not federal law. Mississippi joins in that motion, and -- in light of the fact that S& P and Moody's removed its case on alternative grounds -- argues in a separate set of briefs that federal jurisdiction is also lacking under both CAFA and the general diversity statute. In addition, Mississippi seeks an order directing S& P and Moody's to pay the State's attorney's fees and costs on the ground that the removal of the case was not objectively reasonable. Finally, Tennessee and South Carolina move to dismiss the Declaratory Judgment Cases brought by S& P, principally on the theory that the Court must refrain from deciding them in light of the States' parallel civil enforcement actions under the " abstention" doctrine established by the Supreme Court in

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Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971).

For the reasons discussed below, the States' motions are granted (except insofar as Mississippi seeks attorney's fees and costs), the State Cases are all remanded back to state court, and the Declaratory Judgment Cases are dismissed altogether. That result is compelled by the fundamental and oft-repeated proposition that, while state courts are courts of general jurisdiction, federal courts " are courts of limited jurisdiction" and " possess only that power authorized by Constitution and statute, which is not to be expanded by judicial decree." Rasul v. Bush, 542 U.S. 466, 489, 124 S.Ct. 2686, 159 L.Ed.2d 548 (2004) (internal quotation marks omitted). In light of that proposition, the Supreme Court has instructed that a federal court must " presume[] that a cause lies outside [its] limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994) (citations omitted). The presumption against federal jurisdiction is especially strong in cases of this sort, involving States seeking to vindicate quasi-sovereign interests in enforcing state laws and protecting their own citizens from deceptive trade practices and the like. Put simply, S& P and Moody's fail in their efforts to rebut that presumption, as the State Cases arise solely under state law and Congress has not authorized federal courts to hear such cases. Further, in light of that conclusion and the fact that S& P can raise any and all defenses it may have under federal law in state court, indulging S& P's Declaratory Judgment Cases would constitute an unwarranted interference in South Carolina's and Tennessee's state court proceedings.

BACKGROUND

The following background is taken from the States' Complaints and federal regulatory materials, which are either referenced by the parties or are important to the understanding of the jurisdictional issues in question. Because this Court has an independent obligation to establish the existence of subject-matter jurisdiction over these cases, the facts alleged in the Complaints are accepted as true for purposes of these motions, but no inferences are drawn in either party's favor; the party asserting jurisdiction must show it affirmatively. See, e.g., Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir. 1998). Moreover, in determining whether jurisdiction exists, consideration of extrinsic materials and documents of which judicial notice may be taken is permissible. See, e.g., Phifer v. City of New York, 289 F.3d 49, 55 (2d Cir. 2002). For the sake of simplicity -- and following the parties' lead in their briefing -- citations to information common to the Complaints are to the Complaint filed by the State of Tennessee. (Docket No. 1-1, 13 Civ. 4098 (" Tenn. Compl." )).[1]

A. The Rating Agencies

As noted, S& P and Moody's are in the business of selling credit ratings. " A credit rating is a rating agency's assessment with respect to the ability and willingness of an issuer to make timely payments on a debt instrument, such as a bond, over the life of that instrument." S. Rep. No. 109-326, at 2 (2005)

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(Conf. Rep.). Put more simply, a credit rating is an attempt to predict how likely it is that an entity that has borrowed money will pay that money back.[2] Credit-rating agencies develop their ratings by inputting a series of variables into a computerized model that analyzes the risks associated with the financial instrument in question. (Tenn. Compl. ¶ 43). For residential-mortgage-backed financial products, for example, that information would include the loan principal amount, loan-to-value ratios, price data for the relevant geographic markets, credit scores of the borrowers, and the structure of the product being offered. ( Id.). S& P's analytical models " are built on a series of assumptions with respect to probability of default and asset correlation," so the models will give different outputs depending on the agency's estimate of the assumed variables. ( Id. ΒΆ 44). Once the model has been applied to the data, the output is summarized using a letter-grade system that declines in quality as follows: AAA, AA, ...


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