McGraw Hill Financial Inc. and Standard & Poor’s asked a panel of judges to pack up 15 state lawsuits in which they’re accused of inflating securities ratings and ship them to New York where the companies are based.

Lead defense lawyer Floyd Abrams told the Judicial Panel on Multidistrict Litigation in Louisville, Kentucky, today that the cases stem from the same facts and almost all were filed at the same time in their home states’ courts.

The state complaints have “identical claims and almost identical language,” Abrams told the panel. Most importantly, they are “based on identical facts” and should be treated collectively, said Abrams, a partner in New York-based Cahill Gordon & Reindel LLP.

McGraw Hill and S&P seek to consolidate the cases in New York, where defense lawyers say they could be most easily coordinated with a single judge reviewing all court filings and arguments. The states oppose that plan, arguing their attorneys general should be able to enforce their own state laws in their own state courts.

Most of the states sued in February in conjunction with a U.S. complaint filed in Los Angeles federal court that alleges S&P downplayed risks associated with the mortgage-backed securities to increase its revenue and market share.

McGraw Hill and S&P have called the state and federal allegations meritless.

February Complaints

Cases were filed in February by Arizona, Arkansas, California, Colorado, Delaware, Idaho, Iowa, Maine, Missouri, North Carolina, Pennsylvania, South Carolina, Tennessee, Washington and the District of Columbia. Mississippi had filed a suit earlier.

McGraw Hill and S&P removed all but California’s case from the state courts where they were filed to their geographically overlapping federal courts as a prelude to its bid to get them grouped for pretrial proceedings in New York.

Today’s arguments were heard by a panel of six federal judges drawn from courts in San Francisco, New York, Philadelphia, San Antonio, Topeka, Kansas, and Concord, New Hampshire. A seventh judge, John G. Heyburn of Louisville, the chairman of the panel, recused himself from the arguments without public explanation.

“Traditionally, we don’t centralize based on a common issue of law,” Judge Charles Breyer of San Francisco told Abrams. Breyer asked whether the panel should wait for rulings on several pending requests to have the states’ cases returned to their state courts.

Multiple Judges

Abrams responded that some of those state judges have already said having multiple judges decide the same remand issue is a waste of judicial resources.

Delaware Deputy Attorney General Greg Strong led the states’ opposition to consolidation. He told the panel the attorneys generals were capable of working together without it.

The chief law officer for each jurisdiction wants to enforce the law of his state, Strong said. He added later that there would be “significant harm and significant expense” in compelling attorneys general from states as far as Arizona and Idaho to travel to New York.

Panel Judge Lewis Kaplan, who sits on U.S. District Court in Manhattan, called that argument “a wee bit exaggerated,” noting the litigants would still need to come to New York for depositions of McGraw Hill and S&P witnesses and that the cases would be returned to their home federal courts for trial.

Ratings Statements

Ratings statements are matters of opinion, protected by the U.S. Constitution’s guarantee of free speech, Abrams said in a March 8 filing with the panel. Congress has said that neither the U.S. Securities and Exchange Commission nor any state can regulate ratings or the methods by which they’re determined, he said.

Attorneys general for every jurisdiction except the District of Columbia, including a mix of Republicans and Democrats, have opposed the consolidation bid.

Defense bids to remove earlier-filed cases in Connecticut and Illinois foundered when federal judges ruled those transfers were made too late and returned the suits to state courts. The federal judge in Illinois also said there was no U.S. jurisdiction for the case there.

Federal judges in Washington, Pennsylvania and elsewhere have frozen the action on cases before them until the multidistrict litigation panel answers the consolidation question.

Tennessee Attorney General Robert Cooper, a Democrat, said in an April 2 filing that his state has been investigating S&P for three years “for misrepresentations made about its independence, objectivity and desire for revenue, in operating as a credit rating agency.”

Consumer Laws

Cooper called his colleagues’ cases “sovereign enforcement actions” against S&P for its alleged violations of each state’s consumer protection laws. He said the companies haven’t carried their burden of proving consolidation is warranted.

“This case presents a classic consumer fraud dispute at the heart of a state’s traditional police powers, free of federal issues that would remotely support removal jurisdiction,” Iowa Attorney General Tom Miller said in his April 2 filing opposing S&P’s consolidation plan.

Federal courts don’t have jurisdiction over his case, Miller, a Democrat, said.

S&P can’t use a federal defense such as free speech or Congress’s 2006 Credit Rating Agency Reform Act, referenced in Abrams’s March filing to create federal jurisdiction, Republican Attorney General Alan Wilson of South Carolina, said in his April 2 opposition papers.

New York

Even if the panel deems grouping of the cases before one federal judge is warranted, New York shouldn’t be that place, Wilson said.

The attorney general cited the court’s already busy docket and said none of the cases at issue are pending there.

“Our airports are open,” Abrams said of New York in his argument today. “Anyone who has anything to do with this case lives there.”

The multidistrict case is In Re: Ratings Agency Litigation, MDL No. 2446, Judicial Panel on Multidistrict Litigation (Louisville, Kentucky).

Editors: Peter Blumberg, Stephen Farr