Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES NEWS: States Challenge Standard & Poor’s Ratings of Structured Debt Securities, (Feb 5, 2013)
Organizations Mentioned:McGraw-Hill | McGraw-Hill Companies, Inc. | Standard & Poor's Ratings Services | Standard & Poor’s Ratings Services | U.S. Department of Justice
By Tobias J. Gillett, J.D., LLM.
At least 16 states and the District of Columbia have joined the U.S. Department of Justice in filing lawsuits against the credit rating agency Standard & Poor’s Ratings Services over the company’s allegedly inflated ratings of structured financial products, including mortgage-backed securities and collateralized debt obligations.
The attorneys general of Missouri, Illinois, Connecticut, Colorado, Mississippi, Arizona, Arkansas, California, the District of Columbia, Iowa, North Carolina, Maine, Pennsylvania, Tennessee, Washington, Delaware, and Idaho have announced that their states have filed lawsuits under the federal Financial Institutions Reform, Recovery and Enforcement Act, and various state unfair competition and deceptive practices laws against the ratings company.
Standard & Poor’s provides ratings of various securities that are intended to permit investors to determine which of the securities carry the most risk. According to the complaints, Standard & Poor’s claimed that it provided these ratings objectively and independently. In reality, the complaints allege, Standard & Poor’s relationships with investment banks led it to overrate the securities in order to obtain higher fees from the banks. Standard & Poor’s also limited and delayed updates to its ratings system and criteria to prolong its ratings, despite knowing that they significantly overrepresented the strength of the underlying investments.
The high ratings given to these securities purportedly caused investors, including state and federal institutional investors, to put their funds into residential mortgage backed securities investments. When the 2008 financial crisis occurred, and the housing market collapsed, these securities, including many that had received Standard & Poor’s highest rating, began defaulting, resulting in massive losses to the investors.
"For years, S&P placed its priority on maintaining its market share, instead of the investors who trusted in its supposedly objective ratings," said California Attorney General Kamala D. Harris. "When the housing bubble burst, S&P’s house of cards collapsed and California paid the price—in billions. S&P must be held accountable for its conduct that contributed to one of our country's worst financial crises."
“Standard & Poor’s was a trigger for the destruction of our economy,” Illinois Attorney General Lisa Madigan said. “While the big banks and lenders built mortgage-backed bombs, it was S&P’s faulty ratings that detonated them.”
The complaints seek a variety of equitable relief and penalties from Standard & Poor’s and its parent company, McGraw-Hill Companies, Inc. California’s complaint also includes a claim for triple damages under the state’s False Claims Act.
Companies: Standard & Poor’s Ratings Services; McGraw-Hill Companies, Inc.
News: ConsumerProtection StateUnfairTradePractices