S&P penalty may reach $5 billion from U.S. suit over ratings

E-mails Cited

The Justice Department cited e-mail from S&P employees discussing the need to modify ratings criteria to win business after the company’s grades were more conservative than competitors.

“Losing one or even several deals due to criteria issues, but this is so significant that it could have an impact on future deals,” one analyst said in a May 2004 e-mail cited in the lawsuit. “There’s no way we can get back on this one but we need to address this now in preparation for future deals.”

The credit-grading business was targeted by lawmakers in the 2010 Dodd-Frank Act after the collapse of top-ranked mortgage-backed securities contributed to $2.1 trillion in losses at the world’s largest banks. Reports from the Senate panel, along with the Financial Crisis Inquiry Commission, cited failures of the companies as a reason for the financial crisis.

While the 18-month recession ended in June 2009, with the global economy contracting 2.4% that year, the U.S. has yet to recover 3.23 million of the 8.74 million jobs that were lost. The unemployment rate last month was 7.9%, compared with 5% in January 2008.

Separate Probe

New York Attorney General Eric Schneiderman, who is helping to lead a state-federal group probing misconduct in the bundling of mortgage loans into securities, is separately investigating S&P over its ratings on mortgage bonds, according to a person familiar with the matter who asked not to be identified because the investigation hasn’t been made public.

Attorneys general from at least two U.S. states have filed claims against S&P challenging its method of rating mortgage- backed securities.

Madigan, who sued S&P more than a year ago, commended Holder and her state colleagues in a statement today.

“Standard & Poor’s was a trigger for the destruction of our economy,” Madigan said. “While the big banks and lenders built mortgage-backed bombs, it was S&P’s faulty ratings that detonated them.”

Free Speech

In a Nov. 7 decision, Cook County, Illinois, Circuit Court Judge Mary Anne Mason rejected defense arguments that ratings firms’ opinions were protected by constitutional guarantees of free speech. A status conference is scheduled for March 26.

In 2009, then-Ohio Attorney General Richard Cordray sued S&P, Moody’s and Fitch at the U.S. court in Columbus, accusing the firms of issuing faulty ratings that caused five public employee pension funds, on whose behalf he sued, to buy money-losing investments.

U.S. District Judge James L. Graham threw out the case in September 2011, ruling the ratings were “predictive opinions,” and that absent specific allegations of intent to defraud, the firms could not be held liable.

A Cincinnati-based federal appeals court unanimously upheld that decision in December.

Cordray was appointed by President Barack Obama in January 2012 as director of the federal Consumer Financial Protection Bureau in Washington.

The case is U.S. v. McGraw-Hill, 13-00779, U.S. District Court, Central District of California (Los Angeles).

Bloomberg News

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