Dealbook reported today that the “Justice Department, along with state prosecutors, plans to file civil charges against Standard & Poor’s Ratings Service” accusing S&P of “fraudulently rating mortgage bonds.”
S&P proactively issued a press release, which states that the company “today disclosed that the Civil Division of the United States Department of Justice (“DOJ”) has informed the Company that it intends to file a civil lawsuit against S&P focusing on its ratings in 2007 of certain U.S. collateralized debt obligations (“CDOs”)”. S&P continued that:
A DOJ lawsuit would be entirely without factual or legal merit. It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market – including U.S. Government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained – and that every CDO that DOJ has cited to us also independently received the same rating from another rating agency. S&P deeply regrets that our CDO ratings failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time. However, we did take extensive rating actions in 2007 – ahead of other ratings agencies – on the residential mortgage-backed securities (“RMBS”) which were included in these CDOs. As a result of these actions, more collateral or other protection was required to support AAA ratings on CDOs. With 20/20 hindsight, these strong actions proved insufficient –but they demonstrate that the DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.
S&P’s press release provided details of the RMBS transactions it did downgrade, and detailed its efforts to avoid issuer influence, improve its models and methodologies, and enhance regulatory compliance.
Citing “people briefed on the plan,” Dealbook reported that:
The case is expected to be brought in California, these people said. The state suffered disproportionately during the housing bubble, and the government is hoping the venue will yield more sympathetic jurors.
The case is focusing on about 30 collateralized debt obligations, an exotic type of mortgage security. According to S&P, the mortgage securities were created in 2007 at the height of the housing boom.
Prosecutors, according to the people, have uncovered troves emails by S&P, employees, which the government considers damaging. Portions of those emails are likely to be disclosed in the government’s complaint against S&P, these people said.
The suit is expected to be filed this week. Stay tuned.