The Big Money in States' Big Lawsuits
When states win legal cases, where does the money go?
Connecticut soon will get $36 million of a $1.37 billion legal settlement with Standard & Poor's, resolving allegations that the credit ratings agency misled investors in rating mortgage-backed securities in the lead-up to the 2008 financial crisis.
Connecticut initiated the legal action against S&P, but it isn't the only state to get settlement money. Eighteen other states and the District of Columbia, which joined with Connecticut and the U.S. Justice Department in the civil litigation, will get shares that will go to their general funds, pension systems and state programs.
In many of the states, attorneys general will get to keep some of the money to finance other investigations and lawsuits when they suspect laws have been broken, or consumers or taxpayers have been harmed.
The S&P case illustrates the role attorneys general play in bringing civil suits or criminal complaints, why they bring them and what they seek in pursuing the cases. And it's instructive in showing what happens to the money they win in damage awards or in settlements.
"Compliance (with the law) is the first responsibility," said James Tierney, director of the National State Attorneys General Program at Columbia University Law School.
After that, he said, the goals are to try to recover ill-gotten gains to repay victims, to punish bad behavior and to try to deter similar unlawful activity in the future.
"Paying out (damages) hurts them and helps create a deterrence," said Tierney, a former Maine attorney general. "And it hopefully goes back to aggrieved parties."
Attorneys general bring hundreds of cases a year against businesses big and small, alleging unlawful activity, charity and fly-by-night contracting scams, Medicaid and securities fraud, and other deceptive practices that harm consumers and taxpayers.
In January alone, they brought nearly four dozen cases individually or in conjunction with their colleagues in other states, according to a compilation by the National State Attorneys General Program.
Perhaps the most famous of multistate lawsuits was against the tobacco industry, brought by 46 states, which alleged the industry deceptively marketed cigarettes knowing their hazards. It was settled in 1998 and guaranteed annual payments to the states in perpetuity to fund anti-smoking campaigns and pay for public health costs tied to smoking.
In February 2012, all 50 states participated with the federal government in a $25 billion settlement with five of the nation's largest mortgage service companies and banks over abuses and fraud in home foreclosures and mortgage servicing practices following the housing collapse.
Most of the mortgage settlement money was distributed among the states to help individual homeowners hang onto their homes. But some was set aside with the National Association of Attorneys General (NAAG) to provide $10 million in a fund that attorneys general could tap to help finance the investigation and litigation.
The idea is that when attorneys general tap the fund, they commit to paying it back if their cases are successful and they can, said Chris Toth, NAAG's deputy executive director.
The S&P settlement announced Feb. 3 is an outgrowth of action Connecticut originated in 2010 after suspecting that the world's largest financial services ratings agency rigged the risk ratings it gave to some structured financial securities, including chancy subprime mortgage-backed bonds.
The bonds' collapse helped trigger the 2008 global financial meltdown that sank equity markets, drove financial firms into bankruptcy, forced the U.S. government to bail out banks and exacerbated economic conditions in the U.S., which already had entered a recession.
"The whole world economy was damaged by what they (S&P) did," said Connecticut Attorney General George Jepsen, a Democrat. "Connecticut was damaged like everyone else. Connecticut's citizens had their 401ks blown up, their pensions blown up."
Several pension and hedge funds that had bought the securities had unsuccessfully sued S&P for its ratings, alleging the agency was negligent in making them and that they deceived investors. Their suits were dismissed after S&P had argued its ratings were opinions, not fraud, and thus protected by the First Amendment.
But the Connecticut attorney general's office thought differently. It alleged that in the run-up to the subprime meltdown, S&P had inflated its ratings to satisfy the investment houses that sold the securities and which were paying S&P to rate them.
In other words, the ratings agency was systematically making money by misrepresenting the credit worthiness of the bonds, in violation of the unfair trade practices law. Jepsen said his office had the evidence to prove it.
"Connecticut came up with the unfair trade practices theory. We said, 'We can prove you systematically jiggered your ratings ... in violation of unfair trade practices law.'"
Mississippi signed onto the Connecticut action in 2011. Illinois followed. And in late 2012, Jepsen and attorneys in his office, along with those from attorneys general offices in 30 states, met in Washington with Justice Department officials, who signed onto Connecticut's legal argument.
In the end, the District and 16 other states _ Arizona, Arkansas, California, Colorado, Delaware, Idaho, Indiana, Iowa, Maine, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington _ joined Connecticut, Illinois and Mississippi, saying they also had been damaged by S&P's actions.