We previously posted (here and here) about the Justice Department’s civil suit against Standard & Poor’s concerning its ratings of CDO transactions, which was filed in February in the Central District of California (the complaint is available here). The Complaint brings claims against S&P under the Financial Institutions Reform, Recovery & Enforcement Act (“FIRREA”) and seeks $5 billion from S&P. Among other things, the DOJ claims that S&P was aware of the deteriorating housing market and did not adjust its methodologies. In support of these allegations, the government cites internal S&P emails, instant message exchanges, and a employee-created video parading the imploding housing market. (For coverage of these emails and videos, please see here and here).

Yesterday, S&P filed its moving brief in support of its motion to dismiss the DOJ’s complaint. S&P argues that the Complaint should be dismissed because it fails to properly allege either a “scheme to defraud” or specific intent as required by the fraud statutes. S&P argues that:

Each of the representations identified by the Government is the type of vague, generalized statement that court after court—in this District, this Circuit and elsewhere across the country—has held to be non-actionable in a federal fraud case such as this. Most notably and revealingly, the Government has simply chosen to ignore a Second Circuit opinion, filed just six weeks before the Government filed its Complaint and of which the Government was fully aware, holding that the very same S&P statements the Government relies upon here cannot be the basis for a finding of fraud under federal law.

The case cited by S&P, Boca Raton Firefighters and Police Pension Fund v. Bahash, was decided by the Second Circuit in December, 2013, and dismissed a 10b-5 action brought by shareholders against S&P. The Second Circuit held that “[t]he statements alleged in the Fund’s complaint regarding McGraw-Hill’s integrity and credibility and the objectivity of S&P’s credit ratings are the type of mere “puffery” that we have previously held to be not actionable.”

S&P also takes issue with the government’s allegations on intent, arguing that:

In addition, the Complaint fails to allege that S&P possessed the requisite intent to defraud the investors in the CDOs at issue. It is more than ironic that two of the supposed “victims,” Citibank and Bank of America—investors allegedly misled into buying securities by S&P’s fraudulent ratings—were the same huge financial institutions that were creating and selling the very CDOs at issue. In other words, the Complaint charges S&P with intending to defraud these financial institutions about the likely performance of their own products. With respect to other investors—those who were not also issuers of the securities at issue—the Government relies entirely on a claim that runs contrary to the rest of its case. For this narrow purpose, the Government claims that in fact the investors paid S&P’s fees, even though for all other purposes it claims that S&P was motivated by the fact that issuers pay its rating fees, not investors. Such contradictory pleadings cannot suffice as an allegation of intent to defraud.