The fallout from last year's credit collapse continues as another state has sued the nation's credit agencies, accusing them of misleading investors.

Ohio Attorney General Richard Cordray has filed a lawsuit against Standard & Poor's, Moody's and Fitch, three national agencies that are responsible for providing accurate credit ratings of investments.

The lawsuit, filed in United States District Court for the Southern District of Ohio on behalf of five Ohio public employee retirement and pension funds, charges the rating agencies with wreaking havoc on U.S. financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers.

"The rating agencies were central players in causing the worst economic crisis in Ohio since the Great Depression," Cordray said. "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."

Other state probes

Ohio isn't the first state to point a finger at the credit agencies. Last year New York Attorney General Andrew Cuomo wrapped up a probe of rating agencies last year, obtaining an agreement by the firms to change the way they charge fees for reviewing mortgage-backed securities. Connecticut Attorney General Richard Blumenthal has also investigated the rating agencies.

Cordray's 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 Cordray's preliminary estimates, the improper ratings cost the Ohio Funds losses in excess of $457 million.

"Contrary to the representations of the rating agencies, these mortgage-backed securities were, in fact, high-risk investments that lost tremendous value as the housing market collapsed and mortgage foreclosures accelerated," said Cordray, a former state and county treasurer.

'Spectacularly misleading'

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. Cordray maintains 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 reportedly 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."

The Ohio lawsuit is being brought on behalf of the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the Ohio Police & Fire Pension Fund, the School Employees Retirement System of Ohio and the Ohio Public Employees Deferred Compensation Program.