The attorney general of the US state of Ohio, Richard Cordray yesterday filed charges against leading credit rating agencies yesterday as their false and misleading credit ratings on mortgage-backed securities cost the state $457 million.

The lawsuit, filed in US District Court for the Southern District of Ohio on behalf of five Ohio public employee retirement and pension funds, charges Standard & Poor's, Moody's Investors Service and Fitch ratings of wreaking havoc on the US financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers.

The lawsuit alleges the rating agencies gave many of these exotic investments the highest investment-grade credit rating. This rating – often referred to as ''AAA''– is consistent with the credit ratings given to the safest corporate bonds, and it assured institutional investors, including the Ohio funds, that the investments were extremely safe with a very low risk of default.

According to preliminary estimates, the improper ratings cost the Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, state Police and Fire Pension Fund, School Employees Retirement System of Ohio and state Public Employees Deferred Compensation Program, losses in excess of $457 million.

The lawsuit alleges that the rating agencies made spectacularly misleading evaluations of mortgage-backed securities due in part to the lucrative fees they received from the same issuers they were supposed to be objectively evaluating.

He alleges that public statements and testimony indicate that rating agency executives and analysts knew their ratings of mortgage-backed securities were wrong. Indeed, one rating agency analyst admitted that the market for mortgage-backed securities was ''little more than a house of cards'' with a much higher risk of devaluation than indicated by the purported investment-grade ''AAA'' rating. Another rating agency analyst said that ''we rate every deal. It could be structured by cows and we would rate it.''

Cordray said, ''The rating agencies were central players in causing the worst economic crisis in Ohio since the Great Depression. The rating agencies assured our employee pension funds that many of these mortgage-backed securities had the highest credit ratings and the lowest risk. But they sold their professional objectivity and integrity to the highest bidder. The rating agencies' total disregard for the life's work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what's wrong with Wall Street today.''

''This misconduct has caused immense harm to Ohio police officers, firefighters, teachers, government workers, investors and retirees,'' said Cordray. ''Our lawsuit against these rating agencies is another step toward holding Wall Street accountable for its wrongs.''

Attorney General Cordray's fight to hold Wall Street accountable now includes eight major lawsuits, which have recovered more than $2 billion to date.

Recent settlements include $284.5 million with secondary defendants in a case involving AIG; $400 million with Marsh & McLennan; $475 million with Merrill Lynch; and the cancelling of $922 million in improperly granted stock options to corporate executives at UnitedHealth.

Cordray is also representing the Ohio Funds in several major securities cases, including class action securities lawsuits against AIG, Bank of America, Fannie Mae, and Freddie Mac.

Raymond McDaniel, CEO and chairman of Moody's, described the ratings frenzy: ''What happened in '04 and '05 … is that our competition, Fitch and S&P, went nuts. Everything was investment-grade. It really didn't matter… No one cared because the machine just kept going.''

In September, the US regulators have put their weight on credit rating agencies demanding more disclosures on their rating history.

Under the new rules finalised by the US Securities and Exchange Commission (SEC) yesterday, credit rating agencies will have to reveal more information about past ratings so investors can compare their relative performance. (See: SEC tightens regulations for credit rating agencies)

The California Attorney General Jerry Brown had issued a subpoenas in September to Standard & Poor's, Moody's Investors Service, and Fitch Ratings in an investigation focusing on whether the agencies broke consumer protection and unfair business practice laws.

"These agencies gave their seal of approval, their highest ratings, to underlying securities that were highly dangerous and in fact wreaked havoc on the lives of millions of people," Brown had said at a news conference.

The US credit rating industry is dominated by a few such as Standard & Poor's, Moody's Investors Service, and Fitch Ratings. Many of these industry giants have overseas subsidiaries.