US to bring civil lawsuit against S&P for positive ratings on CDOs

S&P says case that stems from financial crash is ‘entirely without merit’

Ratings agency Standard & Poor’s (S&P) faces a civil lawsuit from the US Department of Justice (DoJ) related to its ratings of certain US collateralized debt obligations (CDOs) in 2007 in the lead-up to the global financial crash, S&P has disclosed. The case marks the first ever civil lawsuit brought by the US government against a ratings agency.

The DoJ informed S&P of its intentions yesterday and the ratings agency, in the press release announcing the notification, launched a vigorous defense of its ratings action regarding CDOs in the lead-up to the crash, saying the case ‘would be entirely without factual or legal merit’.

‘It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market – including US government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained – and that every CDO the DoJ has cited to us also independently received the same rating from another rating agency,’ S&P says.

‘S&P analysts worked diligently to keep up with an unprecedented, rapidly changing and increasingly volatile environment, while acting to ensure changes to their ratings reflected robust analysis and deliberation.’

The case stems from top ratings awarded by ratings agencies to securities packaged out of dubious residential mortgages in the lending boom that inflated the US housing bubble and helped spark the financial crash. Critics of the agencies accuse them of keeping ratings high in order to win fees. The civil nature of the lawsuit means S&P could face fines but no officials face criminal prosecution.

Talks between S&P and the DoJ failed to reach a settlement, and the case should be filed as early as this week, the Washington Post reports, citing unidentified people close to the case. Before announcing it would file a civil lawsuit, the DoJ pushed for a fine of $1 bn and admission of guilt by the ratings agency, according to the Financial Times, which also cites unidentified people. The FT says the case centers on 30 CDOs issued in the first half of 2007 that were rated AAA by S&P.

In recent years, the SEC has also pursued legal action against various companies for their behavior in the lead-up to the financial crisis, including Citigroup, Goldman Sachs, JPMorgan Securities, Credit Suisse Securities, Wells Fargo, and others.

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