Shareholders win legal right to inspect S&P’s pre-financial crisis records

Appellate court ruling reverses earlier legal decision

A New York Appellate [appeals] Court has ruled that shareholders in media giant McGraw-Hill, owner of the powerful rating agency Standard & Poor’s (S&P), may inspect S&P’s records prior to the financial crisis of 2008 to determine whether there was evidence of wrongdoing at the agency.

The investors allege S&P undertook a “strategy of fraudulently issuing positive ratings on complex financial products” like residential mortgage-backed securities (RMBS), collateralized debt obligations (CDOs), and others, according to court documents.

According to them, the mortgage-related securities “at the heart of the meltdown” would not have been marketed and sold without S&P’s ratings.

The petition seeks to investigate “alleged mismanagement and breaches of fiduciary duty” by the McGraw-Hill board in failing to oversee purported wrongdoing by S & P. McGraw-Hill already faces a lawsuit from the US government seeking $6bn (€4.6bn) in damages stemming from S&P’s ratings.

The investor petition is by two small shareholders in McGraw-Hill, including the $50m Retirement Plan for General Employees of the City of North Miami Beach, which sought access to S&P’s records before 2008. McGraw-Hill challenged the petition in a New York court, saying that it exceeded what it was legally required to disclose to shareholders.In May 2013, New York Justice Jeffrey Oing had ruled in favour of McGraw-Hill, saying the depth of information sought went beyond legal precedent.

The shareholders, represented by Philadelphia lawyer Robert Roseman, then turned to a New York Appellate Court, which has now unanimously reversed Oing’s decision.

“Shareholders have rights to inspect a corporation’s records”

The court ruled: “Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose.” The court added that, contrary to McGraw-Hill’s claims, “investigating alleged misconduct by management and obtaining information that may aid legitimate litigation are, in fact, proper purposes for the request” – and that a hearing will be necessary to determine the scope of inspection. Roseman told The New York Law Journal: “We’re very pleased with the panel’s recognition of the rights of shareholders of a New York corporation. Our intention has always been to gather enough information to see if there is a basis to bring a lawsuit or whether the board is independent or not.” Cahill Gordon & Reindel, McGraw-Hill’s legal defence, declined to comment.