By Bill Kenealy, Crain News Service
WASHINGTON (Feb. 6, 2013) — In a legal attempt to assign blame for the nation's financial crisis, the U.S. government sued credit-rating firm Standard & Poor's Financial Services L.L.C. for allegedly underestimating the risks of mortgage-related securities leading up to the 2008 housing market meltdown.
The U.S. Department of Justice filed a civil lawsuit late Feb. 4 in Los Angeles federal court against New York-based S&P and its corporate parent, the McGraw-Hill Cos. Inc., under auspices of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The law enables the justice department to seek civil penalties equal to the losses suffered by federally insured financial institutions. The government said it could seek more than $5 billion from S&P in this case.
Separately on Feb. 5, the state of California filed a lawsuit in San Francisco Superior Court against S&P, alleging the ratings firm violated both the state's unfair competition laws and False Claims Act. The lawsuit said that since California's public pension funds purchased securities based on false statements from S&P, the defendant is responsible for the amount lost times three.
U.S. Attorney General Eric Holder said in a statement Feb. 5 that S&P engaged in a scheme between 2004 and 2007 to defraud investors by purposely manipulating ratings criteria and credit models used to gauge the riskiness of the collateralized-debt obligations (CDOs) at the epicenter of the financial crisis.
"We allege that, by knowingly issuing inflated credit ratings for CDOs, which misrepresented their creditworthiness and understated their risks, S&P misled investors, including many federally insured financial institutions, causing them to lose billions of dollars," Mr. Holder said.
This report appeared in Business Insurance magazine, a Chicago-based sister publication of Tire Business.