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.
S & P believes that the statements prosecutors rely upon in their case are not actionable, seeing as other courts have struck down similar challenges in past federal cases. The credit rating agency cited the example of Boca Raton Firefighters and Police Pension Fund v. Bahas, in which U.S. Court of Appeals for the Second Circuit’s decision affirmed the tossing out of a pension fund’s securities case against S & P after finding that statements about the “credibility and objectivity” of the agency’s ratings were the type of “puffery” that previously was not considered actionable.
Also, S & P claims the allegations it misled investors about its ratings’ objectivity and accuracy don’t succeed in this CDO lawsuit. Rather, they demonstrate that during what proved to be the start of an economic meltdown, there was debate within the agency about how complex financial instruments might fare moving forward.
Read the Complaint (PDF)
More Blog Posts:
US Justice Department Sues Standard and Poor’s Over Allegedly Fraudulent Ratings of Collateralized Debt Obligations, Stockbroker Fraud Blog, February 5, 2013
Standard & Poor’s Misled Investors By Giving Synthetic Derivatives Its Highest Ratings, Rules Australian Federal Court, Institutional Investor Securities Blog, November 8, 2012