Fitch Ratings class can add fraud claims after finding hidden evidence
Financial Services July 13, 2018 9:46 pm By Miklos Bolza | Sydney

The firm running the class action against Fitch Ratings over SCDO products has been given the go ahead to add claims of fraud and deceit after lawyers allegedly unearthed a hidden mathematical table the agency used in assigning ratings to the toxic financial products.

Federal Court Justice Michael Wigney granted the interlocutory application by Squire Patton Boggs to add the claims after the firm discovered the concealed, password-locked table in one of the computer models used to calculate the probability of default for investment portfolios in 2007, ahead of the global financial crisis.

The judge pushed back the October trial date to June or July next year, to give Fitch a chance to respond to the new allegations.

The class action, filed in October 2014 and funded by International Litigation Partners, accuses Fitch of giving false and misleading triple A and double A ratings to select synthetic collateralised debt obligations (SCDOs), allegedly resulting in massive investor losses. The ratings agency is also alleged to have failed to disclose material facts about its ratings methodology, acted unconscionably, and breached its duty of care to investors and potential investors.

During the second day of an interlocutory hearing, on Thursday, barrister Christopher Withers for the class said Fitch was liable for deceit and dishonest concealment for the hidden table in the Vector model, which was different to the table publicly presented in the model’s user manual.

“Fitch failed to disclose to anybody using the Vector manual and relying upon the rating or considering whether to rely on the rating, that it in fact used a different table altogether to determine what rating to assign to these products,” he told Judge Wigney.

Not only did the hidden table make it easier to prescribe a higher rating than the corporate table in the manual, but the figures within the hidden table were set manually without a rational explanation, the barrister said.

“[There] is no empirical or theoretical basis for these figures and, therefore, the ratings were irrational and lack an empirical, theoretical or analytical basis… Fitch knew that its ratings with the SCDOs were irrational, unreasonable and cannot be believed or relied upon and they were recklessly indifferent to the truth of the representations … about the ratings – that they were based on unreasonable grounds,” Withers said.

Fitch’s barrister Jeremy Stoljar, SC, told the judge the new claims of fraud and deceit were “ambiguous” and a “jump” from the class action’s prior pleadings of negligence.

“In what way is it said to be dishonest or fraudulent, and who and how, and how was it achieved?” he asked Judge Wigney.

“The mere fact, were it to be established, that there was some irrationality or unreasonableness about the model does not prove that somebody has behaved fraudulently. To do an extra step one needs to spell out precisely what is actually being asserted.”

Fitch was accused by SPB partner Amanda Banton, at the first day of the hearing Wednesday, of having the “standard defendant whinge” about discovery in its fight against SPB’s new pleadings.

The next case management hearing has been scheduled for July 24.

Fitch is represented by Maddocks.
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Christine Caulfield

Christine Caulfield has been a journalist for 18 years. She was most recently the Co-Managing Editor at US legal news publication Law360. Prior to that she worked as the County Court reporter for The Herald Sun. She is Co-Founder and Editor of Lawyerly.