The United States Department of Justice (DOJ) and state prosecutors are planning to file civil complaints against Standard & Poor’s Ratings Services (S&P) for alleged misconduct in its mortgage bonds ratings prior to the 2008 financial crisis, according to a report from the Wall Street Journal citing unnamed sources.
Standard & Poor’s Rating Services is a division of The McGraw-Hill Companies, Inc. (NYSE:MHP). According to the report, the primary focus of the allegations is the model used by the S&P in rating mortgage bonds. Federal and state authorities are expected to file their complaint this week.
The proposed action of the federal authorities against Standard & Poor’s Rating Services is the first enforcement action against a rating agency on claims of wrongdoings related to the 2008 financial crisis. Several state attorney-general are expected to participate in the case thus, making the it the highest-profile and widest-ranging enforcement crisis-era crackdowns.
According to sources familiar with the issue, the imminent lawsuits against S&P 500 (INDEXSP:.INX) follow the collapse of the long-time settlement negotiations between the DOJ and the rating agency.
The Wall Street Journal cited that the details regarding the forthcoming charges against the S&P is not yet clear or couldn’t be identified immediately, including the reasons why prosecutors are focused on the rating agency instead of its rivals Moody’s Corporation (NYSE:MCO) and Fitch Ratings, a division of F Marc de Lacharriere Fimalac SA (EPA:FIM) and Hearst Corporation. Lawmakers criticized the three credit rating agencies for allegedly providing overly rosy ratings to thousands of subprime-mortgage bonds prior to the meltdown of the housing market.
Two years ago, the Financial Crisis Inquiry Commission said the credit rating agencies were “key enablers of the financial meltdown.” Government authorities have been investigating the rating agencies to determine if they violated securities laws or just fell short in predicting the housing crisis.
The Wall Street Journal previously reported that, U.S. prosecutors questioned former S&P 500 (INDEXSP:.INX) analysts to discover if S&P managers ignored the agency’s standards in evaluating mortgage-backed securities in favor of investment banks. The DOJ asked the former analysts to provide details regarding S&P documents and correspondences since 2004.
Mortgage-bond investors filed civil lawsuits against credit rating agencies. The imminent civil charges against the S&P could force a showdown over the primary defense used by the credit rating agency on its case against the mortgage-bond investors. The S&P argued that its ratings are opinions and are protected by the First Amendment of the United States.
An Australian court ruled, last year, that S&P 500 (INDEXSP:.INX) committed “misleading and deceptive” practices by givig AAA ratings on constant proportion debt obligations (CPDOs) in 2006.