Connecticut’s Attorney General George Jepsen notes Connecticut is leading the way on this suit and had sued S&P and Moody’s in 2010.
Sixteen states and the District of Columbia joined the suit.
“We believe that S&P’s analytical models for rating structured finance securities were directly influenced by the demands of S&P’s powerful investment banking clients,” Jepsen said. “Contrary to what S&P was publicly representing, S&P served its own financial interests and those of the investment banks. Countless investors and market participants, including state regulators, were misled by S&P’s promise that its analysis was independent and objective. S&P violated the trust that it purposefully cultivated with the marketplace leading to disastrous results,”
The state lawsuits seek court orders to stop S&P from making misrepresentations to the public; changes in the way the company does business; civil penalties and disgorgement of ill-gotten profits, which may total hundreds of millions of dollars.
Connecticut’s lawsuit, brought under the Connecticut Unfair Trade Practices Act, is pending in Hartford Superior Court. The States of Mississippi and Illinois filed lawsuits against S&P in 2011 and 2012, respectively, based on Connecticut’s theory of the case.
Filing lawsuits today are: Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee, and Washington.
Connecticut also assisted the initial stages of the Department of Justice’s investigation because of its earlier investigation of S&P.
The complaints allege that investors and other market participants, such as state regulators, relied on S&P’s promises of independence and objectivity. Instead, S&P acted to benefit its own financial interests by adjusting its analytical models for rating residential mortgage-backed securities and collateral debt obligations to ensure it assigned as many AAA ratings as possible. Assessing actual credit risk was of secondary importance to revenue goals and winning new business, the complaints allege.
Further, the complaints allege that S&P’s profit motive affected its monitoring, or surveillance, on previously rated RMBS and CDOs. In order to continue earning lucrative fees, the complaints allege, S&P delayed taking rating actions on impaired RMBS and continued rating new CDOs even after it determined that the security’s underlying collateral was impaired.
The congressionally appointed bipartisan Financial Crisis Inquiry Commission concluded in its final report that the financial crisis “could not have happened” without ratings agencies such as S&P.
S&P and its chief competitor, Moody’s Investors Service, Inc. dominate the market for rating structured finance securities and are responsible for rating virtually all structured finance securities issued into the global capital markets. Connecticut has brought a similar lawsuit against Moody’s, which is pending in state court.
Here’s a snippet from the DOJ’s press release:
WASHINGTON – Attorney General Eric Holder announced today that the Department of Justice has filed a civil lawsuit against the credit rating agency Standard & Poor’s Ratings Services alleging that S&P engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The lawsuit alleges that investors, many of them federally insured financial institutions, lost billions of dollars on CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. The complaint also alleges that S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors.