SAN FRANCISCO (Legal Newsline)- CalPERS, the nation's largest public pension fund, may sue three Wall Street bond-rating agencies over failed investments containing risky debt, a judge in California has ruled.

The California Public Employees' Retirement System last year filed a lawsuit against Moody's Investors Service, Standard & Poor's and Fitch Ratings, accusing the credit-rating firms of assigning "wildly" inflated ratings to structured investment vehicles.

The pension fund says the firms' misrepresentations that the packages of loans and debt were top-grade investments ultimately caused CalPERS at least $1 billion in losses.

CalPERS is seeking unspecified damages from the rating firms.

San Francisco Superior Court Judge Richard Kramer on April 30 rejected the credit firms' request to toss the fund's claims of negligent misrepresentation. The judge did, however, deny CalPERS's claim of negligent interference.

Before former Republican Gov. Pete Wilson appointed him to the bench in 1996, Kramer represented the banking industry in civil litigation.

The case is California Public Employees' Retirement Systems v. Moody's Corp et al, Superior Court of California, San Francisco County, No. 09-490241.

In 2006, CalPERS reportedly bought $1.3 billion of medium- and short-term debt issued by three structured investment vehicles: Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc.

The debt, which collapsed in 2007 and 2008, had been assigned top ratings by Moody's, S&P, which is a McGraw-Hill company, and Fitch, a unit of Fimalac SA of France. The three companies have denied any wrongdoing.

CalPERS provides pension and health care benefits to about 1.6 million public employees and their dependants. It had assets of roughly $209 billion as of market close Tuesday.

Separately, California Attorney General Jerry Brown is pursuing what he called malfeasance on the part of Moodys, S&P and Fitch in proving grossly inflated ratings of risky mortgage-backed securities.

Last month, he asked a judge to compel Moody's to comply with a state subpoena in the investigation.

Brown has accused Moody's and the two other credit-rating firms of contributing to the near-collapse of the U.S. financial services industry and the housing market in recent years.

From Legal Newsline: Reach staff reporter Chris Rizo at chrisrizo@legalnewsline.com.