S&P Expects U.S. Lawsuit Over Wrongdoing Before Financial Crisis

S&P Expects U.S. Lawsuit Over Wrongdoing Before Financial Crisis

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Standard & Poor's I expected to become the target of a U.S. Department of Justice civil lawsuit over its mortgage bond ratings during financial crisis. Photo: Haydn Blackey/Flickr
Standard & Poor’s I expected to become the target of a U.S. Department of Justice civil lawsuit over its mortgage bond ratings during financial crisis. Photo: Haydn Blackey/Flickr

Ratings agency Standard & Poor’s revealed that it will be sued by the government for its positive rating of mortgage bonds in the very heart of the crisis. However, the agency has denied any legal wrongdoing.

A spokesman for Justice Department declined to comment on the matter, but media reports claim that the suit, which is expected to be joined by state governments, will be probably filled this week.

The complaint will become the first one filled by the U.S. government against a credit ratings agency. Standart & Poor’s, along with peers Moody’s and Fitch, has been heavily criticized for failing to unearth the problems with certain collateralised debt obligations.

“This lawsuit is significant because it could augur future government action or, even worse for the agencies, more litigation by investors,” said Jeffrey Manns, a law professor at George Washington University in Washington, D.C.

As The Telegraph writes, the US suit appears to allege that S&P’s high ratings on CDOs played a major role in the crisis because of the confidence they engendered in investors.

According to S&P, in 2007 and prior to that period, it had downgraded a number of residential mortgage-backed securities included in the CDOs ahead of other ratings agencies.

“With 20/20 hindsight, these strong actions proved insufficient – but they demonstrate that the DoJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith,” it said.

Standart & Poor’s went on, saying: “A DOJ lawsuit would be entirely without factual or legal merit. The DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.”

Reuters writes that in a variety of lawsuits filed by investors, the agency outlined that its ratings constitute opinions protected by the free speech clause of the American Constitution.

Justice Department spokeswoman Adora Andy and Moody’s spokesman Michael Adler refused to comment, while Fitch spokesman Daniel Noonan said, “We are unable to comment on the S&P matter as it does not involve us, other than to say we have no reason to believe Fitch is a target of any such action.”

Several state attorneys general led by Connecticut’s George Jepsen will likely join the case, revealed to the media a source familiar with the matter.

Previous lawsuits brought by Connecticut and Illinois accused the company of violating consumer fraud laws by stating its ratings as objective, even though it ignored increasing risks of the securities in order to cater to the investment banks that provided the firm with revenue.

A spokeswoman for Jepsen refused to comment on the matter. The Wall Street Journal was first to report the pending charges.

The attorney general in New York is still examining a separate probe of the rating firm, a person familiar with that matter said.

S&P is a unit of McGraw-Hill, whose shares fell to 13.8 percent Monday after the news of the suit surfaced. Fellow ratings agency Moody’s was also lower, by 10.7 percent.