ISBN 978-91-7678-956-8
The_Liability_credit_hela.2.indd 1
The Liability of Credit Rating Agencies to Investors
tion of the global financial markets. They rate the ability of debtors to make timely interest payments and the likelihood of default. In the wake of the US subprime mortgage crisis, the credit rating industry sustained sharp criticism as it was revealed that they had systematically inflated ratings of mortgage-backed securities in the years prior to the crisis. As a result, investors that have suffered losses in the crisis filed lawsuits against the credit rating agencies. Furthermore, lawmakers in financial-centre-nations regulated the credit rating agencies extensively. This thesis analyses the liability of credit rating agencies to investors from a Swedish perspective. It identifies and analyses the applicable liability rules in Swedish private law and penal law. It also discusses central liability issues, namely the standard of care, degrees of negligence, legal causation, factual causation, and the credit rating agencies’ standard disclaimers. The thesis is of interest for legal practitioners and legal scholars dealing with issues pertaining to the liability of credit rating agencies.
Emil Nästegård
AAA CCC BBB D Ca Aa B3 Baa
CREDIT RATING AGENCIES are vital to the opera-
The Liability of Credit Rating Agencies to Investors A Swedish Perspective
Emil Nästegård
2015-12-22 21:53
The Liability of Credit Rating Agencies to Investors – A Swedish Perspective
Emil Nästegård
Contents Acknowledgements 5 Abbreviations 15 1 Introduction 19 1.1 1.2 1.3
1.4
Problem description 19 Purpose and research questions 23 Method and material 27 1.3.1 Introduction 27 1.3.2 Economic arguments 28 1.3.3 Equitable considerations and fairness assessments 29 1.3.4 Fact-based arguments 31 1.3.5 Comparative law 32 1.3.6 Methodological differences between private law and penal law 36 The legal systems discussed in this work 37 1.4.1 The common law tradition and the civil law tradition 37 1.4.2 The legal systems discussed in this work 37 1.4.2.1 The legal system of England 37 1.4.2.2 The legal system of the United States of America 38 1.4.2.3 The legal system of Australia 40 1.4.2.4 The legal system of Sweden and of other Scandinavian countries 41 1.4.2.5 The legal system of the EU 43
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1.5 1.6 1.7 1.8
Delimitations and clarifications 44 Previous research 46 The choice of language 48 Terminological and conceptual remarks 50 1.8.1 General remarks 50 1.8.2 Terms and concepts 51 1.8.3 Certain case names 52 1.8.4 The concept ‘pure economic loss’ 53 1.9 Structure 56
PART I: BACKGROUND 59 2 The Credit Rating Industry 61 2.1 The role of credit rating agencies 61 2.2 The forward-looking characteristic of credit ratings 65 2.3 The users of credit ratings 67 2.3.1 Institutional investors 67 2.3.1.1 A heterogeneous category of investors 67 2.3.1.2 The institutional investors’ internal investment policies 69 2.3.2 Other users of ratings 70 2.4 The dominant credit rating agencies 71 2.5 Minimum rating requirements in legal rules 74 2.6 The transition to the issuer-pays business model 78 2.7 The credit rating process 80 2.8 Default correlation studies 83 2.9 The insurance situation in CRA liability cases 84 2.10 Summary and conclusions 88
3 Financial Crises and CRA Regulatory Reforms 89 3.1 The malfunctioning reputational capital model 89 3.2 The CRAs’ role in the US subprime mortgage crisis 91 3.3 The CRA regulatory reforms 99 3.3.1 Measures at the global level 99 3.3.2 Regulatory reforms in the US 100 8
3.4
3.3.3 Regulatory reforms in the EU 106 3.3.3.1 Background 106 3.3.3.2 Regulation (EC) No 1060/2009 107 3.3.3.3 The amending regulations 108 3.3.3.4 An overview of Regulation (EC) No 1060/2009 (including the two amending regulations) 111 Summary and conclusions 121
PART II: THE LIABILITY RULES 123 4 Article 35a of Regulation (EC) No 1060/2009 125 4.1 Background 125 4.2 Article 35a as adopted by the European Parliament and the Council of the EU 128 4.3 Two classes of claimants 130 4.4 The standard of fault 130 4.5 Annex III and the concept ‘impact’ 132 4.6 The concept ‘reasonably relied’ 133 4.7 Disclaimers 135 4.8 Article 35a’s dependence on the national laws of the Member States 136 4.9 The burden of proof 137 4.10 Further civil liability claims 140 4.11 ESMA fines 141 4.12 Summary and conclusions 142
5 The Reasonable Reliance Principle in Swedish Law 145 5.1 A historical overview: quasi-contracts 145 5.2 An extra-contractual theory of reasonable reliance 149 5.2.1 The Tort Liability Act 149 5.2.2 The requirement ‘criminal behaviour’ 150 5.2.3 Extra-contractual liability for professional negligent misstatements 152 5.2.4 Reasonable reliance as the ground for liability 156 9
5.3
5.2.5 Rule VI.-2:207 of the DCFR 160 5.2.6 Is the change in legal techniques of any practical relevance? 161 5.2.7 Recent case law 162 Summary and conclusions 167
6 Liability Rules in Penal Law 170 6.1 Introduction 170 6.2 Swindling 171 6.2.1 The second paragraph of Article 9 of Chapter 9 of the Penal Code of 1962 171 6.2.2 Criminal liability and vicarious liability 173 6.2.3 Published or disseminated information 175 6.2.4 The recipients of the information 176 6.2.5 The nature of the information 177 6.2.6 The subjective element 178 6.3 Market manipulation 179 6.3.1 The second paragraph of Article 8 of the Financial Instruments Trading (Market Abuse Penalties) Act 179 6.3.2 ’Trading on the securities market or otherwise’ 182 6.3.3 ’Intended to affect or mislead’ 182 6.3.4 Market manipulation compared to swindling 184 6.3.5 Vicarious liability and criminal liability 185 6.4 Summary and conclusions 185
PART III: COMPLETING A CAUSE OF ACTION 189 7 Legal Causation 191 7.1 7.2 7.3 7.4 7.5
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Introduction 191 The adequate cause doctrine 191 The Scandinavian unlawfulness doctrine 195 The scope of the rule doctrine 197 The Anglo-American floodgates argument 199 7.5.1 Introduction 199
7.5.2 Foreseeability 202 7.5.3 Practical manageability 203 7.5.4 Proportionality 208 7.6 The proximate relationship between the disputing parties 209 7.7 Summary and conclusions 212
8 The Circle of Protected Recipients 214 8.1 Introduction 214 8.2 Swedish law 215 8.3 Foreign law 220 8.3.1 Europe and Australia 220 8.3.2 The United States of America 225 8.3.2.1 § 552 of the Restatement (Second) of Torts 225 8.3.2.2 Linking conduct 233 8.3.3 Secondary market investors 236 8.4 Summary and conclusions 240
9 The Standard of Care 242 9.1 Introduction 242 9.2 Is the civil liability of CRAs professional liability? 244 9.3 Standards of conduct for CRAs 248 9.3.1 Introduction 248 9.3.2 Regulation (EC) No 1060/2009 249 9.3.2.1 Annex III 249 9.3.2.2 The concept ‘impact’ 250 9.3.2.3 Infringements relating to obstacles to the supervisory activities 252 9.3.2.4 Infringements relating to disclosure provisions 252 9.3.2.5 Infringements relating to organisational requirements 254
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9.4
9.5
9.3.2.6 Infringements relating to operational requirements 255 9.3.2.7 Infringements relating to conflicts of interest 268 9.3.3 The IOSCO Code of Conduct Fundamentals for Credit Rating Agencies 271 9.3.3.1 Introduction 271 9.3.3.2 The IOSCO CRA Code of Conduct 274 9.3.3.3 The implementation of the IOSCO CRA Code of Conduct in the EU 276 9.3.4 Can the EU Regulation and the IOSCO Code of Conduct be regarded as the good practice for CRAs? 279 9.3.5 The purposes of the public law framework 280 9.3.6 The nature of the individual public law rules 283 The degrees of negligence 285 9.4.1 Introduction 285 9.4.2 Ordinary negligence 285 9.4.3 Gross negligence 286 9.4.4 Some thoughts on the distinction between ordinary and gross negligence 289 Summary and conclusions 291
10 Disclaimers 295 10.1 Introduction 295 10.2 Article 35a(3) 296 10.3 Moody’s and S&P’s standard disclaimers 297 10.3.1 Introduction 297 10.3.2 No responsibility for external sources 298 10.3.3 Statements of opinion, not statements of fact 299 10.3.4 Not investment advice, warranties or recommendations 302 10.3.5 Are the standard disclaimers exclusions or limitations? 304 10.4 Reasonable and proportionate limitations 305 10.4.1 General remarks 305 12
10.4.2 Monetary limitations 308 10.4.3 Limiting liability for ordinary negligence 310 10.5 Summary and conclusions 312
11 Factual Causation 314 11.1 Introduction 314 11.2 Recent case law 315 11.3 The hypothetical question in CRA liability cases 319 11.4 The role of minimum rating requirements in the test of factual causation 321 11.5 The institutional investors’ own credit risk assessments 322 11.5.1 ‘Reasonably relied’ 322 11.5.2 The information on which the investor’s own credit risk assessment is based 324 11.5.3 Different scenarios 326 11.5.3.1 Introduction 326 11.5.3.2 Scenario 1 328 11.5.3.3 Scenario 2 331 11.5.3.4 Scenario 3 333 11.5.3.5 Scenario 4 340 11.5.3.6 Scenario 5 342 11.6 Summary and conclusions 342
PART IV: CONCLUSIONS 349 12 Conclusions 351
PART V: EXCURSUS 369 13 The First Amendment Defence in US Law 371 14 Democratic Aspects on the Credit Rating Industry 377 Appendices 383 Appendix I: Moody’s standard disclaimer 383 Appendix II: S&P’s standard disclaimer 387 13
Bibliography 390 Literature 390 Legislative assemblies, public authorities, and international standard setters 414 Companies and other private organisations 423 Other sources 425
Legislation, Model Rules and Treaties 427 Table of Cases 433
14
ISBN 978-91-7678-956-8
The_Liability_credit_hela.2.indd 1
The Liability of Credit Rating Agencies to Investors
tion of the global financial markets. They rate the ability of debtors to make timely interest payments and the likelihood of default. In the wake of the US subprime mortgage crisis, the credit rating industry sustained sharp criticism as it was revealed that they had systematically inflated ratings of mortgage-backed securities in the years prior to the crisis. As a result, investors that have suffered losses in the crisis filed lawsuits against the credit rating agencies. Furthermore, lawmakers in financial-centre-nations regulated the credit rating agencies extensively. This thesis analyses the liability of credit rating agencies to investors from a Swedish perspective. It identifies and analyses the applicable liability rules in Swedish private law and penal law. It also discusses central liability issues, namely the standard of care, degrees of negligence, legal causation, factual causation, and the credit rating agencies’ standard disclaimers. The thesis is of interest for legal practitioners and legal scholars dealing with issues pertaining to the liability of credit rating agencies.
Emil Nästegård
AAA CCC BBB D Ca Aa B3 Baa
CREDIT RATING AGENCIES are vital to the opera-
The Liability of Credit Rating Agencies to Investors A Swedish Perspective
Emil Nästegård
2015-12-22 21:53