Articles Posted in Standard and Poor’s

Credit rating agency Standard & Poor’s will pay $1.5 billion to settle a number of lawsuits accusing the company of inflating the ratings of mortgage securities in the lead up to the 2008 economic crisis. As part of the deal, S & P’s parent company McGraw Hill will pay $687.5 million to the U.S. Justice Department and $687.5 million to the District Columbia and 19 states over their inflated ratings cases.

The U.S. sued the credit rater in 2013, asking for $5 billion and claiming that S & P had bilked investors. The company fought the claims, arguing that the First Amendment protected its ratings and contending that the mortgage ratings case was the government’s way of retaliating after S & P downgraded the United States’ own credit rating. As part of the settlement, the credit rating agency said it found no evidence that retaliation was a factor.

S & P is not admitting to violating any law. It noted that its mission is to give the marketplace information that is independent and objective and employees are not allowed to influence analyst opinions because of commercial relationships.

According to the Wall Street Journal, the U.S. Department of Justice has been meeting with ex-Moody’s Investor Service (MCO) executives to talk about the way the credit ratings agency rated complex securities prior to the 2008 financial crisis. Sources say that the probe is still in its early stages and it is not certain at the moment whether the government will end up filing a bond case against the credit rater.

DOJ officials are trying to find out whether the company compromised its standards in order to garner business. The government’s focus is on residential mortgage deals that took place between 2004 and 2007.

Moody’s and credit rating agency Standard and Poor’s gave triple A ratings to the deals so that even conservative investors were buying the subprime loan-backed securities. The investments later proved high risk. When the housing market failed, the bond losses cost investors billions of dollars.

Standard & Poor’s has agreed to settle U.S. Securities and Exchange Commission charges accusing the credit rating agency of fraudulent misconduct when rating certain commercial mortgage-backed securities. As part of the settlement, S & P will pay close to $80 million—$58 million to resolve the regulator’s case, plus $12 million to settle a parallel case by the New York Attorney General’s Office, and $7 million to resolve the Massachusetts Attorney General’s case.

The SEC put out three orders to institute resolved administrative proceedings against the credit rater. One order dealt with S & P’s practices involving conduit fusion SMBS ratings methodology. The Commission said that the credit rating agency’s public disclosures misrepresented that it was employing one approach when a different one was applied to rate several conduit fusion CMBS transactions, as well for putting out preliminary ratings on two transactions. To resolve these claims S & P will not rate conduit fusion CMBSs for a year.

The SEC’s second order said that after S & P was frozen out of the market for its conduit fusion ratings in 2011, the credit rating agency published a misleading and false article claiming to show that it’s overhauled credit ratings criteria enhancement levels could handle economic stress equal to “Great Depression-era levels.” The Commission said that S & P’s research was flawed, were made based on inappropriate assumptions, and the data used was decades off from the Depression’s serious losses. Without denying or admitting to the findings, S & P has consented to publicly retract the misleading and false data about the Depression era-related study and rectify inaccurate descriptions that were published about its criteria.

According to The Wall Street Journal, Standard & Poor’s Ratings Services is close to arriving at a securities settlement with regulators over the way they graded real-estate bonds. The agreement would resolve claims by the U.S. Securities and Exchange Commission, Massachusetts Attorney General Martha Coakley, and New York Attorney General Eric Schneiderman.

The proposed deal is over six commercial real estate bond ratings issued by the credit rater in 2011. In July of that year, S & P withdrew a preliminary rating on a $1.5 billion security comprised of commercial real-estate loans. The decision made debt issuers and investors very angry. (The deal was later partially overhauled and eventually went to market.)

S & P discovered discrepancies in the way its ratings methodology applied for commercial real estate deals. However, it said the incongruence was not outside what is considered an acceptable range. Still, investigators were compelled to look at the withdrawn rating and other deals from that period.

The attorneys general of Washington, Arizona, South Carolina, Arkansas, Pennsylvania, Colorado, North Carolina, Delaware, Missouri, Idaho, Maine, Mississippi, Indiana, Tennessee, and Iowa want their securities cases against Standard & Poor’s Rating Services and its parent company The McGraw-Hill Companies Inc. sent back to their state courts. They contend that the cases don’t have federal jurisdiction.

The AGs submitted their consolidated brief in the U.S. District Court for the Southern District of New York. They say that the states’ respective complaints are exclusively state law action causes and the credit rating agency can’t use affirmative defenses to put together federal jurisdiction.

It was the U.S. Judicial Panel on Multidistrict Litigation that moved the 15 state securities lawsuits against Standard & Poor’s to New York’s federal court. Panel chairman Judge Kathryn Vratil, who presides over the U.S. District Court for the District of Kansas, said that they had determined that the “actions involve common question of fact” and centralizing them would be more convenient and expedient for everyone involved. One common “question of fact” was over whether the credit rater “intentionally misrepresented” that its structured finance securities analysis was unbiased, autonomous, and not impacted by its business ties with securities issuers.

Liquidators are suing Moody’s Investors Service (MCO), Standard & Poor’s, and Fitch Ratings over their issuing of allegedly fraudulent and inflated ratings for the securities belonging to two offshore Bear Stearns (BSC) hedge funds. The plaintiffs are seeking $1.12 billion.

The credit raters are accused of misrepresenting their autonomy, the timeliness of their residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) ratings, and the quality of their models. Because of the purportedly tainted ratings for securities that were supposedly “high-grade,” the funds lost $1.12B.

The funds, which were operated by Matthew Tannin and Ralph Cioffi, failed in 2007. The US government later pursued the two men for securities fraud, but they were acquitted. They did, however, settle an SEC securities case over related allegations last year.

U.S. District Judge David O. Carter for the Central District of California has turned down Standard & Poor’s bid to have the Justice Department’s $5 billion securities lawsuit against it dismissed. This affirms Carter’s recent tentative ruling earlier on the matter.

S & P is the largest credit rating agency in the world. It is a McGraw Hill Financial Inc. unit.

According to the US government, the credit rater fraudulently misrepresented its ratings process as objective and independent when it was, in fact, stymied from issuing ratings because of its desire to please banks and other clients. Instead, between 2004 and 2007, S & P purportedly issued AAA ratings to certain poor quality mortgage packages, including residential mortgage-backed securities, collateralized debt obligations, and subprime mortgage-backed securities. Now, prosecutors want to recover the losses that credit unions and federally insured banks allegedly suffered because of these inaccurate ratings that it contends upped investor demand for the instruments until the prices soared and the market collapsed, contributing to the global economic meltdown that followed.

A U.S. district judge in California has put out a tentative decision in the $5B fraud lawsuit against Standard & Poor’s indicating that he will likely reject a motion to dismiss the civil case against the credit rating agency. Judge David Carter said he needs more time to come up with his final ruling, which is expected on July 15, but for now, he is turning down S & P’s request to toss out the case outright.

Federal prosecutors sued S & P contending that the credit rater chose not to alert investors that the housing market was failing in ‘06 and inflated high-risk mortgage investments’ ratings. The Obama Administration said the ratings agency did not act fast enough to put downgrade a large number of subprime-backed securities despite realizing that home prices were dropping and borrowers were finding it hard to pay back loans. Instead, collateralized debt obligations and mortgage-backed securities continued to receive elevated ratings from the top credit rating agencies, allowing banks to sell trillions of these investments.

Contending that the credit rater committed fraud by making false claims that its ratings were objective, the US Department of Justice wants S & P to pay $5 billion in penalties, The government believes that between 9/04 and 10/07, S & P delayed updating both its ratings criteria and analytical models, which means the requirements were weaker than what analysts say should have been necessary to ensure their accuracy. During this time, S & P credit rated about $1.2 trillion in structured products related to $2.8 trillion worth of mortgage securities and charged up to $750 per rated deal. The government says that this means that S & P saw the investment banks that put out the securities as its primary customers.

In the U.S. District Court for the Central District of California, Standard & Poor’s Financial Services LLC is asking for the dismissal of a US Department of Justice securities fraud lawsuit accusing the ratings firm of knowing that it was issuing faulty ratings to collateralized debt obligations and residential mortgage-backed securities during the financial crisis. S & P is contending that the claims are against judicial precedent and don’t establish wrongdoing.

The government sued the credit rating giant and its parent company McGraw-Hill Companies Inc. (MHP) earlier this year. It claims that S & P took part in a scheme to bilk investors by wrongly representing that its ratings for collateralized debt obligations and residential mortgage backed securities were independent and objective, purposely giving artificially high ratings to specific securities, and ignoring the risks involved. Submitted under the 1989 Financial Institutions Reform, Recovery, and Enforcement Act, this is the first federal legal action filed against a rating agency related to the economic crisis.

Now, however, S & P is arguing that the DOJ’s RMBS lawsuit does not succeed in alleging fraud. The credit rater says that it shouldn’t be blamed for not having been able to foresee the financial crisis of 2008.

A ruling by the Australian Federal Court against Standard & Poor’s could give 13 NSW councils about A$30M in compensation for their about A$16M in synthetic derivative losses. According to the court, the ratings firm misled investors by giving its highest ratings to complex investment instruments that ended up failing during the worldwide economic crisis. The councils can now claim compensation from S & P and co-defendants Royal Bank of Scotland (RBS)– owned ABN Amro Bank and the Local Government Financial Services, Ltd. The three had sold the councils constant proportion debt obligation notes, promoted as Rembrandt notes, six years ago.

Specifically to this case, Australian Federal Court Justice Jayne Jagot said that Standard & Poor’s took part in conduct that was “deceptive” when it gave AAA ratings to constant proportion debt obligations that were created by ABN Amro Bank NV. The Australian townships were among those that invested what amounted to trillions of dollars in the CPDOs, as well as in collateralized debt obligations.

The projected A$30M in compensation includes not just councils’ losses, but also interest and costs. The councils are also entitled to receive compensation for breach of fiduciary duty from LGFS, which succeeded in its own claim against Standard and Poor’s and ABN Amro for Rembrandt notes that it sold to its parent company after the notes were downgraded from their triple-A rating to triple-B+.