Just two years after the ink dried on the Department of Justice’s civil complaint against McGraw-Hill Financial, Inc. and its wholly owned subsidiary Standard and Poor’s Financial Services LLC and almost a decade after S&P was alleged to have misled investors by promoting all-star grades of residential-mortgage bonds as independent and objective, S&P settled prosecutions being conducted by the DOJ, the District of Columbia, and nineteen states for over $1.375 billion, the largest record settlement involving a credit rating firm in history. The settlement agreement requires S&P to pay the DOJ $687,500,000 as well as pay similar amounts to the nineteen states and the District of Columbia.
The DOJ initiated suit against S&P on the basis that it violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a previously underutilized statute that, as we discussed on White Collar Alert, has been rejuvenated by the DOJ in recent years. As detailed in the government’s complaint, S&P was alleged to have knowingly misled investors by overrating residential mortgage backed securities (“RMBS”) and collateralized debt obligations (“CDOs”) during the onset of the 2007 financial crisis. The complaint asserts that S&P’s conduct was fueled by its desire to maintain business relationships with and profit from the banks and companies that issued the RMBS and CDOs. When the housing market collapsed, S&P’s ratings turned out to be inaccurate and in many instances, based on mortgage packages that S&P knew were likely to default. As Attorney General Eric Holder summarized:
On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised. … While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.
Although the settlement agreement and its sixteen-point statement of facts did not require an explicit admission of wrongdoing by either S&P or McGraw Hill, it did require S&P to retract its earlier assertion that the DOJ’s prosecution was political retaliation for the firm’s 2011 downgrade of the United States’ credit rating.
What this historical settlement signals is the increased (and successful) use of FIRREA by the DOJ. The statute has been around for over twenty years without a significant track record, but the DOJ has started to feature it more prominently in civil enforcement actions against financial services and securities companies. Not only does it have a longer statute of limitations, but a civil enforcement action under FIRREA has a lower standard of proof than a criminal enforcement action and provides for the recovery of significant monetary penalties. Although the S&P prosecution is the first enforcement action of its kind against a rating agency, we wouldn’t be surprised to see the government dip its toe into the cool FIRREA waters more frequently in the future.