The first part of this story is familiar: Back in 2007, King County (along with the rest of the country) made some investments that didn't work out. It bet around $100 million on Rhinebridge and Cheyne Finance LLC, two of the many "investment vehicles" that were part of the big-bank game that triggered the Great Recession. The county caught flak for those bets in the Seattle Times and elsewhere, even though those investments were appropriately conservative for a public investment pool—short-term speculations (six months) that had earned the highest ratings from Moody's and Standard and Poor's.

Here's the unusual part: The county, along with 14 other plaintiffs, including Abu Dhabi Commercial Bank, sued the ratings agencies—as well as Morgan Stanley and IKB Deutsche Industriebank—for fraud and won a settlement in the spring. The terms of the settlement remain secret (as part of the deal), but the case might set a precedent for other municipalities that trusted banks and ratings agencies and now feel like they got swindled.

"This is certainly a major crack in their legal armor," says San Francisco attorney Dan Drosman, whose firm represented King County. "Some rulings we obtained in our case were seminal."

For example: S&P and other agencies have claimed in past legal proceedings that their ratings are merely "opinion" and protected by the First Amendment, so they're not liable for bad advice. ("Advice" is the nice word for it, since the lawsuit alleged that the county and the rest of the plaintiffs had been intentionally tricked.) That argument didn't fly in this case. US District Court judge Shira A. Scheindlin found there are opinions and there are opinions. Giving investments the highest stamp of approval and claiming that those ratings (on which billions of public dollars depend) are based on rigorous data analysis is substantially different, in Drosman's words, "than saying Chinese food is better than Indian food."

"These agencies lied to the public," says King County executive Dow Constantine. "I was resolved to do everything in our power to fight for recovery of funds."

The ratings agencies, according to Drosman, "fought us hard and were very reluctant to settle." While strict denial of fraud or any other wrongdoing was also part of the settlement, Drosman guesses the agencies decided to keep the case out of trial because, he claims, "we have very damning evidence." Journalists from the Wall Street Journal and other media outlets were already jockeying for seats in the courtroom, he says, and the agencies and banks wanted to avoid a "day-by-day, blow-by-blow recitation" of the proceedings.

"This was David against Goliath," Constantine says. "We knew we were going up against the credit ratings agencies and the rest of Wall Street... this time, David won."