U.S. Government Slams S&P with $5 Billion Fraud Lawsuit

The government did file a civil lawsuit against Standard & Poor’s accusing the agency of defrauding investors.

Standard & Poor’s is slammed for its rating of mortgage bonds at the peak of the crisis in 2008. Photo: William Buell/Flickr

The U.S. government claims that the famous agency did inflate ratings and understated risks associated with mortgage securities, aiming to gain more business from the investment banks that issued those securities.

“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 lawsuit was filed Monday in federal court in Los Angeles, and it becomes the first case from the government against a ratings agency, a sector that has generally shielded itself from liability by citing First Amendment protection of free speech, Reuters explains.

Besides from the government, sixteen states and the District of Columbia have also filed similar cases against S&P, a unit of the McGraw-Hill Companies Inc.

Standart & Poor’s released a statement on Tuesday denying any legal wrongdoing and promising to 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.

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.”

Senator Carl Levin, who has experience in inquiry into the causes of the financial crisis and singled out credit raters for blame, said in a statement the public was “eagerly awaiting” legal actions tied to the financial crisis.

“The credit rating agencies have yet to acknowledge any blame or make the changes necessary to prevent conflicts of interest from fueling more inflated ratings in the future,” the Democrat from Michigan said.

A source close to the ratings agency revealed that it expected a years-long battle with the government over the lawsuit.

The source went on, adding that settlement talks recently collapsedafter the government sought a penalty of over $1 billion and admissions of wrongdoing, which would exposed the firm to outside liability.

“There was no fraud,” S&P lawyer Floyd Abrams said on CNBC Tuesday morning. “The ratings that were issued were believed by the people who issued them. And that’s what the government has got to disprove.”

The new comes the next day after it surfaced that the agency revealed that it will be sued by the government for its positive rating of mortgage bonds in the very heart of the crisis.

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.

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