The Justice Department, along with state prosecutors, plans to file civil charges against Standard & Poor’s Ratings Service, accusing the firm of fraudulently rating mortgage bonds that led to the financial crisis, people briefed on the plan said Monday.
Up until last last week, the Justice Department had been in settlement talks with S.&P., these people said. But the negotiations broke down after the Justice Department said it would seek a settlement in excess of “10 figures,” or at least $1 billion, these people said, which would wipe out the profits of S.&P.’s parent, the McGraw-Hill Company, for an entire year. McGraw-Hill earned $911 million last year.
A suit against S.&P. would be the first the government has brought against the credit ratings agencies related to the financial crisis, despite continued questions about the agencies’ conflicts of interest and role in creating a housing bubble.
During settlement negotiations, the Justice Department held out the threat of a criminal case against S.&P., the people said. Ultimately, the government plans to bring a civil suit, which has a lower burden of proof than a criminal case.
The case is expected to be brought in California, these people said. The state suffered disproportionately during the housing bubble, and the government is hoping the venue will yield more sympathetic jurors.
The case is focusing on about 30 collateralized debt obligation, an exotic type of mortgage security. According to S&P, the mortgage securities were created in 2007 at the height of the housing boom.
Prosecutors, according to the people, have uncovered troves emails by S&P, employees, which the government considers damaging. Portions of those emails are likely to be disclosed in the government’s complaint against S&P, these people said.
In a statement on Monday, S.&P. said it had received notice from the Justice Department over a pending lawsuit. The ratings agency argued any such legal action would be baseless, since it downgraded plenty of mortgage-backed investments, including in the two years leading up to the financial crisis. It also contended that other observers of the debt markets, including government officials, believed at the time that any problems within the housing sector could be contained.
“A D.O.J. lawsuit would be entirely without factual or legal merit,” the agency said in its statement. “With 20/20 hindsight, these strong actions proved insufficient – but they demonstrate that the D.O.J. would be wrong in contending that S.&P. ratings were motivated by commercial considerations and not issued in good faith.”
Shares in McGraw-Hill were down 10 percent in late trading on Monday, at $52.60.
DealBook: Suit to Accuse S.&P. of Fraud in Mortgage Bond Ratings
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DealBook: Suit to Accuse S.&P. of Fraud in Mortgage Bond Ratings
