A lawsuit has been filed by the U.S. government against the Standard & Poor Agency (S&P). It’s alleged in the complaint that S&P purposely inflated its ratings on risky mortgage investments, which helped to spark the financial crisis in 2008. The suit, filed by the Justice Department in federal court in Los Angeles, alleges that the credit rating agency gave high marks to mortgage-backed securities because it wanted to earn more business from the banks that issued the investments. The government has demanded that S&P pay at least $5 billion in penalties as a result of its alleged wrongdoing.
This case marks a milestone for the Justice Department since it’s the government’s first major action against one of the credit rating agencies which stamped its approval on Wall Street’s soon-to-implode mortgage bundles. The Justice Department has been widely criticized for failing to act aggressively against those companies which contributed to the financial crisis. As expected, Standard & Poor, a unit of the New York-based McGraw-Hill Cos. Inc., referred to the lawsuit in a statement as being “meritless.”
The lawsuit alleges that S&P was aware that home prices were falling, and borrowers were having trouble repaying their loans. Conversely, those realities were not reflected in S&P’s safe ratings that it gave to complex real-estate investments known as collateralized debt obligations and mortgage-backed securities. There was at least one S&P executive who had raised concerns about the company’s proposed methods for rating investments, but that executive’s concerns were ignored. The government contends that the majority of S&P’s executives expressed concern over lowering the ratings on some investments in that it would anger the clients selling those investments and would drive new business to S&P’s rivals. It’s alleged further that this was why S&P ultimately made its decision to provide high marks to those mortgage-backed securities. In a news conference addressing the case, Attorney General Eric Holder had this to say: “Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis.”
The case is an important step forward in the federal government’s ongoing efforts to investigate and punish the conduct that is believed to have contributed to the worst economic crisis in recent history. Joining the Justice Department in announcing the lawsuit were Attorneys General from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa and Mississippi. Each Attorney General has either filed a lawsuit or will file separate fraud lawsuits against S&P. The Justice Department has said it expects more states to sue.
If you need more information on this subject, contact Bill Robertson, a lawyer in our Consumer Fraud Section, at 800-898-2034 or by email at Bill.Robertson@beasleyallen.com.
Source: Associated Press
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