* First U.S. case against credit agency over financial
crisis
* Several states may also join case-WSJ
(Adds S&P; confirming expected lawsuit, background)
Feb 4 (Reuters) – Standard & Poor’s on Monday said it
expects to be the target of a U.S. Department of Justice civil
lawsuit over its ratings of mortgage bonds prior to the recent
financial crisis.
The lawsuit against the McGraw-Hill Cos unit focuses
on its ratings in 2007 of various U.S. collateralized debt
obligations (CDO), S&P; said.
It would be the first federal enforcement action against a
credit rating agency over alleged illegal behavior tied to the
financial crisis.
“A DOJ lawsuit would be entirely without factual or legal
merit,” S&P; said in a statement. “The DOJ would be wrong in
contending that S&P; ratings were motivated by commercial
considerations and not issued in good faith.”
The Justice Department was not immediately available for
comment.
Several state attorneys general are expected to join the
case, The Wall Street Journal said, citing people familiar with
the matter. The expected charges follow the breakdown of talks
between the department and S&P;, the newspaper said, citing the
people.
In afternoon trading, McGraw-Hill shares were down $2.39, or
4.1 percent, at $55.95.
S&P; and its main rivals, Moody’s Corp’s Moody’s
Investors Service and Fimalac SA’s Fitch Ratings, have
long faced criticism from investors, politicians and regulators
for assigning high ratings to thousands of subprime and other
mortgage securities that quickly turned sour.
The rating agencies are paid by issuers for ratings, a
standard industry practice that has nonetheless raised concern
about potential conflicts of interest.
In January 2011, the Financial Crisis Inquiry Commission
called the agencies “essential cogs in the wheel of financial
destruction” and “key enablers of the financial meltdown.”
McGraw-Hill had acknowledged last July that the Justice
Department and SEC were probing potential violations by S&P; tied
to its ratings of structured products, and that it was in talks
to try to avert a lawsuit.
The New York-based company had previously disclosed an SEC
probe into its ratings of a $1.6 billion CDO known as Delphinus
CDO 2007-1. It was not immediately clear whether that CDO is a
focus of the potential lawsuits.
Last July, Mizuho Financial Group Inc agreed to a
$127.5 million settlement to resolve SEC allegations that a U.S.
unit obtained false credit ratings for Delphinus.
In a variety of lawsuits brought by investors, S&P; has
maintained that its ratings constitute opinions protected by the
1st Amendment to the U.S. Constitution.
Last August, a Manhattan federal judge refused to dismiss
one such case, brought by Abu Dhabi Commercial Bank, King County
in Washington state, and other investors against S&P;, Moody’s
and Morgan Stanley over losses in Cheyne, a structured
investment vehicle.
Cheyne went bankrupt in August 2007. A trial is scheduled to
begin on May 6, court records show.
In its statement, S&P; said it “deeply regrets” how its CDO
ratings failed to anticipate the fast-deteriorating mortgage
market conditions, and that it has since spent $400 million to
help bolster the quality of its ratings.
(Reporting by Sarah N. Lynch and Aruna Viswanatha in
Washington, D.C. and Jonathan Stempel in New York; Additional
reporting by Emily Flitter and Karen Freifeld in New York;
Editing by Steve Orlofsky and Bob Burgdorfer)
