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DOJ Fines S&P and Investigates Moody's for Pre-crisis MBS Ratings
Practical Law Legal Update 0-599-0166 (Approx. 3 pages)
DOJ Fines S&P and Investigates Moody's for Pre-crisis MBS Ratings
by Practical Law Finance
| Published on 05 Feb 2015 • USA (National/Federal) |
The DOJ has announced a settlement with S&P relating to allegations that S&P engaged in a scheme to defraud investors in RMBS and CDOs prior to the financial crisis. The DOJ is now also investigating Moody's for certain pre-crisis MBS ratings.
On February 3, 2015, Attorney General Eric Holder announced that the Department of Justice (DOJ), 19 states and the District of Columbia have entered into a $1.375 billion settlement with Standard & Poor's Ratings Services LLP (S&P) and its parent corporation, McGraw Hill Financial Inc. The agreement settles allegations that S&P engaged in a scheme to defraud investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) prior to the financial crisis. The settlement resolves the DOJ's 2013 lawsuit against S&P, along with the lawsuits brought by 19 states and the District of Columbia.
In addition to the $1.375 billion payment, S&P has agreed to:
- Acknowledge conduct associated with its ratings of RMBS and CDOs between 2004 and 2007 in an agreed statement of facts.
- Formally retract an allegation that the DOJ's lawsuit was filed in retaliation for S&P's decisions regarding its credit ratings of the US.
- Comply with the consumer protection statutes of each of the 19 settling states and the District of Columbia and to respond, in good faith, to requests of any of the states or the District of Columbia for information or material concerning any possible violation of those laws.
In its agreed statement of facts, S&P admitted that business concerns impacted its decisions on its ratings models. In particular, S&P admitted that:
- It assured investors that its ratings were independent and objective and would not be affected by any existing or potential business relationship.
- Despite its executives' representations, decisions about the testing and rollout of updates to S&P's model for rating CDOs were made, at least in part, based on the effect that these updates would have on S&P's business relationships with issuers.
- Relevant personnel within S&P knew in 2007 that many RMBS transactions being rated by S&P were delinquent and that losses were probable.
- S&P representatives continued to issue and confirm positive ratings without adjustments to reflect the future negative rating actions that it anticipated.
According to an announcement by McGraw Hill, the company will pay $687.5 million to the DOJ and $687.5 million to the 19 states and the District of Columbia. The aggregate $1.375 billion settlement exceeds the profit S&P earned between 2002 and 2007.
This settlement follows a January 2015 agreement between S&P and the SEC regarding a series of post-crisis federal securities laws violations involving fraudulent conduct in S&P's ratings of certain commercial mortgage-backed securities (CMBS) and RMBS (see Legal Update, SEC Suspends S&P from Rating CMBS Transactions, Issues Orders on Ratings Misconduct).
Separately, S&P agreed to a $125 million settlement with the California Public Employees' Retirement System, a public pension fund that had sued S&P in 2009, claiming that the rating agency's inaccurate ratings caused it hundreds of millions of dollars in losses.
Following the DOJ's settlement with S&P, the DOJ's focus has now turned to an investigation of Moody's Investors Services (Moody's) for issuing inflated ratings on mortgage-backed securities prior to the financial crisis. The DOJ and former Moody's executives have been meeting to discuss Moody's rating of these securities prior to the financial crisis. The Attorneys General of Connecticut and Massachusetts have sued Moody's, alleging similar violations. The investigation is in its early stages and it is unclear whether the DOJ will file its own lawsuit against Moody's.
This Update is based, in part, on material provided by the Accelus service Compliance Complete (http://accelus.thomsonreuters.com/products/accelus-compliance-complete), which provides regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges.