Kathleen G. Kane - Pennsylvania Office of Attorney General - Protecting Pennsylvanians

    


Feb. 5, 2013


Pennsylvania joins lawsuit challenging Standard & Poor's ratings business


HARRISBURG - Pennsylvania Attorney General Kathleen G. Kane Tuesday joined federal and state enforcement actions against the credit rating agency Standard & Poor's LLC and its parent company, the McGraw-Hill Companies, Inc. The lawsuit alleges misconduct by S&P involving securities backed by residential mortgages that were at the heart of the nation's financial crisis.

Pennsylvania's complaint alleges that, despite S&P's repeated statements emphasizing its independence and objectivity, S&P allowed its analysis to be influenced by its desire to earn lucrative fees from its securities-issuing clients.

This alleged misconduct became particularly acute between 2004 and 2007, and continued as recently as 2011. By way of example, the Commonwealth contends that S&P altered its rating methodologies in order to win business, thereby making false or misleading its public representations about its own independence and the reliability of its credit ratings. S&P, according to the complaint, sought to increase revenue and keep its high market share which in turn led S&P to make adjustments to its analytical model so as to make the ratings more business-friendly and appealing to securities issuers.

Securities backed by mortgages were at the center of the financial crisis, according to Kane. These securities, including residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages.

"Countless investors and market participants were misled by S&P's promise that its analysis was independent and objective," said Kane. "We believe S&P violated the trust that it purposefully cultivated with the marketplace, leading to disastrous results."

The lawsuit seeks:

  • A court order declaring that the company's conduct violates the Unfair Trade Practices and Consumer Protection Law;  
  • A court order directing the defendants to comply with that law; and 
  • Civil penalties and disgorgement of ill-gotten profits.

Connecticut was the first state to sue S&P in March, 2010. Its lawsuit, brought under the Connecticut Unfair Trade Practices Act, is pending in Hartford Superior Court.  The States of Mississippi and Illinois filed lawsuits against S&P in 2011 and 2012, respectively.
 
Pennsylvania is among the states filing complaints today. Others include:  Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Idaho, Iowa, Maine, Missouri, North Carolina, Tennessee, and Washington.

The complaint further alleges that S&P's monitoring, or surveillance, of previously rated RMBS and CDOs was affected by revenue considerations. In particular, the complaints allege S&P delayed taking rating actions on impaired RMBS and continued rating new CDOs even after it determined that the securities underlying collateral was impaired, because it wanted to continue to earn lucrative fees.

The congressionally-appointed bipartisan Financial Crisis Inquiry Commission concluded in its final report that the financial crisis 'could not have happened' without ratings agencies such as S&P.


The commonwealth's case is being handled by Senior Deputy Attorneys General John M. Abel and Michael C. Gerdes.


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