We have posted (see 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. In April, S&P moved to dismiss the case, which we covered. S&P’s motion attacked the government’s fraud allegations, arguing that the statements at issue were too vague and generalized, and claimed that the government had failed to properly allege intent.

Yesterday, according to the WSJ, District Judge David Carter issued a tentative ruling rejecting S&P’s motion to dismiss, but indicated he would make a final ruling by July 15th.  The decision was not initially publicly available, but has now been uploaded onto PACER, and is available here.  Judge Carter’s tentative ruling stated that S&P’s statements were not “the mere aspirational musings of a corporation setting out vague goals for its future,” but “they are specific assertions of current and ongoing policies that stand in stark contrast to the behavior alleged by the government’s complaint.” The court further wrote,

The issue of reliance also weighs heavily in favor of Plaintiff’s arguments. The government’s complaint goes to great lengths to plead that S&P made specific representations knowing that they were material to and would be relied on by the investors who used their credit ratings to gauge the creditworthiness of potential investments. See Compl. ¶¶ 49(d), 50, 119(a), 119(c), 120(a)-(b), 270. The complaint quotes from internal documents suggesting that S&P knew that “investor perception that S&P’s ratings accurately reflected credit risk was crucial to S&P’s business.” Compl. ¶ 50.

The court tentatively ruled that “S&P’s ratings were both objectively and subjectively false” given, among other things, the rating agency’s “clear knowledge that CDOs were backed by deteriorating RMBSs,” and found that the government had adequately pled intent.

According to the WSJ,

A tentative ruling, like the one issued on Monday, is often an indication of how a judge is likely to rule eventually, lawyers say. The purpose of such a ruling is typically to narrow the focus of the plaintiffs’ and defendants’ arguments before a judge.

According to coverage of the hearing itself from Law360 (subscription),

At a hearing in Santa Ana, Calif., U.S. District Judge David O. Carter said he needed at least an additional week to think about whether to adopt the tentative decision as a final ruling.

“I’d like some time for reflection on this tentative,” he told the assembled lawyers in his courtroom.

John W. Keker, a lawyer representing S&P, argued that Judge Carter’s tentative ruling “misreads and miscites the complaint in many instances.”


Keker said the Justice Department’s complaint contains “no allegation of a specific intent to defraud investors out of their money and property.”

“They’re seeking to blame the [2008] financial crisis on Standard & Poor’s,” he added.

Assistant U.S. Attorney George S. Cardona said S&P, realizing it had a potential conflict of interest because it was being paid by issuers of the residential mortgage-backed securities it was rating, put in a place a code of practices and conduct to relieve investors’ concerns.