WASHINGTON: The US government is seeking $5bn in its civil lawsuit against Standard & Poor’s, accusing the ratings service of defrauding investors, in one of the most ambitious cases yet from the Justice Department over conduct tied to the financial crisis.
The United States said S&P inflated ratings and understated risks associated with mortgage securities, driven by a desire to gain more business from the investment banks that issued those securities. S&P also falsely claimed its ratings were objective, the lawsuit said.
“Put simply, this alleged conduct is egregious — and it goes to the very heart of the recent financial crisis,” said Attorney General Eric Holder at a news conference in Washington announcing the charges.
The 119-page lawsuit, filed late on Monday in federal court in Los Angeles, is the first from the government against a ratings agency, a sector that has generally shielded itself from liability by citing First Amendment protection.
Sixteen states and the District of Columbia are also suing S&P, a unit of the McGraw-Hill Companies Inc. McGraw-Hill shares were down 5.3 percent at $47.61 yesterday, extending Monday’s declines.
No individuals were charged in the DOJ’s lawsuit, and it was not immediately clear why the government focused on S&P instead of rivals Moody’s Corp or Fimalac SA’s Fitch Ratings, which were also major raters of such securities.
S&P issued a statement yesterday saying the lawsuit is meritless and that it will vigorously defend itself. It said the government “cherry picked” emails to misconstrue analyst activity.
“Claims that we deliberately kept ratings high when we knew they should be lower are simply not true,” the company said.
Floyd Abrams, a lawyer for S&P, predicted the government may have a difficult time proving that S&P intentionally mismarked its own ratings. He also noted that S&P’s opinions on mortgage-related products were not that far from major US policymakers who did not foresee the depth of the financial crisis.
“There was no fraud,” Abrams said on CNBC yesterday morning. “The ratings that were issued were believed by the people who issued them. And that’s what the government has got to disprove.”
Between September 2004 and October 2007, as stress in the housing market was starting to emerge, S&P delayed updates to its ratings criteria and analytical models, which weakened its criteria beyond what analysts believed was needed to make them more accurate, the Justice Department said.
During that period, according to the complaint, S&P issued credit ratings on $2.8 trillion worth of mortgage securities and some $1.2 trillion in related structured products.
It charged up to $750,000 per deal it rated, which meant that S&P viewed the investment banks that issued the securities as its main customers, according to the complaint.
In August 2004, the head of S&P’s commercial mortgage-backed securities sent an email to her colleagues and said they planned to meet to discuss adjusting criteria “because of the ongoing threat of losing deals.”
Reuters
