Five years after the housing market crashed in 2008, the U.S. Justice Department slapped Standard & Poor’s with civil fraud charges, claiming the nation’s largest credit ratings agency issued rosy rating on risky mortgage bonds.
The government said S&P misled investors by bending over backwards to give AAA investment-grade ratings to shoddy securities in order to rack up the fees. The government wants S&P to pay more than $5 billion — roughly what its parent company, McGraw-Hill, has earned in the past seven years.
The lawsuit, filed in a federal court in Los Angeles, is one of the first and most aggressive moves yet to try to hold accountable companies that were at the center of the financial and housing meltdown. While banks settled with the government for $25 billion, a settlement with S&P is possible, but both sides were preparing for a long and costly legal fight.
“Many investors, financial analysts and the general public expected S&P to be a fair and impartial umpire in issuing credit ratings, but the evidence we have uncovered tells a different story,” said Acting Associate Attorney General West in a news release. “Our investigation revealed that, despite their representations to the contrary, S&P’s concerns about market share, revenues and profits drove them to issue inflated ratings, thereby misleading the public and defrauding investors.”
S&P issued a statement saying it expected the DOJ lawsuit and denied any culpability.
“The DOJ and some states have filed meritless civil lawsuits against S&P challenging some of our 2007 CDO ratings and the underlying RMBS models,” wrote S&P in a prepared statement, referring the collateralized debt obligations (CDOs) and residential mortgage backed securities (RMBS). “Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. We will vigorously defend S&P against these unwarranted claims.”