US Justice Department Sues Standard and Poor’s Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations

The US Department of Justice and has filed civil fraud charges against Standard & Poor’s Ratings Service, contending that credit rating agency’s fraudulent ratings of mortgage bonds played a role in causing the economic crisis. Settlement talks with Justice Department reportedly broke down after the latter indicated that it wanted at least $1 billion. S & P was hoping to pay around $100 million. Also, there was disagreement between both sides as to whether or not the credit rater could agree to settle without having to admit to any wrongdoing.

The securities case against S & P involves over 30 collateralized debt obligations, which were created in 2007 when the housing market was at its height. The government believes that between September 2004 and October 2007 the credit rater disregarded the risks that came along with the investments, giving them too high ratings in the interest of profit and gaining market share. The ratings agency allegedly wanted the large financial firms and others to select it to rate financial instruments. Meantime, S & P continued to tout its ratings as objective, misleading investors as a result. S & P would go on to make record profits, and the complex home loan bundles eventually failed.

Although there have been questions for some time now about the credit ratings agencies’ role in creating a housing bubble, this is the first securities lawsuit brought by the government against one of these firms over the financial crisis. It was in 2010 that a Senate probe revealed that from 2004 to 2007 S & P and Moody’s Investors Service (MC) both applied rating models that were inaccurate, which caused them to fail to predict exactly how well the risky mortgages would do. The lawmakers believed that the credit rating agencies let competition between each other affect how well they did their jobs.

S & P claims that a CDO lawsuit by the DOJ would be completely lacking in legal or factual merit. It pointed out that in the two years leading up to the economic collapse it had gone ahead and downgraded a lot of mortgage-backed investments. Also, S & P notes, it had access to the same subprime mortgage data as everyone else-and that every mortgage-backed bond cited by the government also got the same rating from another agency. S & P maintains that when it issued the ratings, it acted in good faith.

Over a dozen federal prosecutors are expected to join the federal securities case. The DOJ had considered also pursuing a criminal case against S & P but has since changed its mind.

U.S. Accuses S. & P. of Fraud in Suit on Loan Bundles, NY Times, February 4, 2013

Feds file suit over S&P mortgage bond ratings, USA Today, February 5, 2013

More Blog Posts:
McGraw Hills, Moody’s, & Standard & Poor’s Can’t Be Held Liable by Ohio Pension Funds for Allegedly Flawed MBS Ratings, Affirms Sixth Circuit, Stockbroker Fraud Blog, December 20, 2012

Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012

Standard & Poors Receives SEC Wells Notice Over CDO Rating, Institutional Investor Securities Blog, September 30, 2011