Varga v. McGraw Hill Financial, Inc., 36 F. Supp. 3d 377

Plaintiffs Geoffrey Varga and Mark Longbottom, as Joint Official Liquidators for two Bear Stearns offshore funds, brought a New York common-law fraud claim alleging the three major credit-rating agencies misrepresented ratings and independence, inducing the funds to buy high-grade RMBS/CDOs that collapsed.
Defendants are S&P (McGraw Hill), Moody’s, and Fitch, each designated an NRSRO under CRARA and subject to SEC rules requiring codes of conduct addressing objectivity and conflicts.
Plaintiffs allege defendants manipulated models and ratings under the issuer-pays model to capture market share, causing Plaintiffs’ funds’ losses; they seek compensatory and punitive damages under New York law.
Defendants removed the case to federal court under 28 U.S.C. §§ 1441 and 1446, asserting federal-question jurisdiction because resolution would require interpreting federal law (CRARA and SEC rules).
The Court applied the Grable/Gunn four-part test for federal-question jurisdiction over state-law claims and concluded the complaint does not necessarily raise a substantial federal issue.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the state-law fraud claim "necessarily raises" a federal issue under Grable	Varga: claim is classic New York common-law fraud; no federal-law construction required to determine falsity, reliance, or injury	Rating Agencies: resolution requires interpreting CRARA/SEC rules because those laws authorize the issuer-pays model and mandate codes addressing independence	Held: No. The fraud claim does not necessarily raise a federal issue; federal law is incidental or a possible defense, not essential to the claim
Whether removal is proper because claim depends on compliance with federally required documents (e.g., codes of conduct)	Varga: false statements in federally mandated or voluntary documents can be adjudicated under state fraud law without construing federal law	Rating Agencies: alleged misrepresentations in SEC-mandated documents make federal-law interpretation required	Held: No. Truth/falsity of statements in federally required documents is evaluated under state law; compliance with CRARA is a defense, not a basis for federal jurisdiction

Gunn v. Minton, 133 S. Ct. 1059 (U.S. 2013) (summarizes Grable four-part test for federal-question jurisdiction over state-law claims)
Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005) (federal issue must be necessarily raised, actually disputed, substantial, and capable of resolution without disrupting federal-state balance)
Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804 (1986) (federal-question inquiry uses the well-pleaded complaint rule)
Caterpillar Inc. v. Williams, 482 U.S. 386 (1987) (a federal defense does not confer federal-question jurisdiction)
Marcus v. AT & T Corp., 138 F.3d 46 (2d Cir. 1998) (artful-pleading doctrine limits avoiding federal jurisdiction by state-law framing)
Purdue Pharma L.P. v. Kentucky, 704 F.3d 208 (2d Cir. 2013) (removal statute construed narrowly; doubts resolved against removability)
Blockbuster, Inc. v. Galeno, 472 F.3d 53 (2d Cir. 2006) (burden of establishing federal jurisdiction is on removing party)
Premium Mortgage Corp. v. Equifax, Inc., 583 F.3d 103 (2d Cir. 2009) (elements of common-law fraud under New York law)
D’Alessio v. New York Stock Exchange, Inc., 258 F.3d 93 (2d Cir. 2001) (state-law claims that rest on violations of federal securities laws can present substantial federal issues)
In re Facebook, Inc., 922 F. Supp. 2d 475 (S.D.N.Y. 2013) (denying remand where state-law negligence claim required exclusively federal-law construction of exchange duties)