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

California Court of Appeals
172 Cal. Rptr. 3d 238 (2014)


Moody’s Investors Service, Inc., Moody’s Corporation, and The McGraw-Hill Companies, Inc. (the Rating Agencies) (defendants) assisted in forming three structured investment vehicles, also known as SIVs. The Rating Agencies were responsible for detailed research and risk analysis regarding these investment vehicles. However, the Rating Agencies also entered into an arrangement to receive fees based on the sales of these investment vehicles. The Rating Agencies assigned their highest rating, AAA, to the three structured investment vehicles. This rating represents the likelihood that someone investing in these investment vehicles would ultimately receive the expected return on the investment. The rating was published in the offering materials for these three investments, along with disclaimers of liability from the Rating Agencies. Very few public details were available regarding the composition of these investment vehicles. The California Public Employees’ Retirement System (CalPERS) (plaintiff) was the largest state public-pension fund in the United States. CalPERS had an institutional policy that limited investments to highly rated products. CalPERS invested in these structured investment vehicles. However, these investment vehicles ultimately collapsed and CalPERS lost hundreds of millions of dollars. CalPERS sued the Rating Agencies, alleging that the AAA rating was a negligent misrepresentation. The Rating Agencies moved to dismiss, but the trial court denied the motion. The Rating Agencies then appealed to the California Court of Appeals.

Rule of Law


Holding and Reasoning (Jenkins, J.)

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