* S&P accused of inflating ratings to win business
* S&P has said Justice Department lawsuit lacks merit
* Final ruling in $5 billion case expected by July 15
By Jonathan Stempel
July 9 A federal judge has made a tentative
ruling to let the U.S. government pursue its $5 billion civil
lawsuit accusing Standard & Poor's of defrauding investors by
inflating credit ratings prior to the recent global financial
In a ruling made public late on Monday, U.S. District Judge
David Carter in Santa Ana, California, said the government had
sufficiently alleged that S&P intended to deceive investors with
ratings that were objectively and subjectively false.
Carter said the complaint described in "comprehensive
detail" how the largest U.S. credit rating agency had "clear
knowledge" that collateralized debt obligations it rated were
backed by deteriorating residential mortgage-backed securities,
but failed to downgrade its ratings.
S&P is a unit of McGraw Hill Financial Inc. It has
maintained that the lawsuit lacks merit. Fourteen U.S. states
and the District of Columbia are suing S&P over similar claims
in the U.S. District Court in Manhattan.
The U.S. Department of Justice's 119-page complaint filed on
Feb. 4, set out a slew of internal warnings that investigators
say show how S&P falsely represented that its ratings from 2004
to 2007 were objective and untainted by conflicts of interest.
It said S&P rated more than $2.8 trillion of RMBS and nearly
$1.2 trillion of CDOs from September 2004 to October 2007, and
was motivated to inflate ratings to add market share and win
more fees from issuers and bankers that pay for its ratings.
Carter said the complaint set forth a dissonance between
S&P's stated policies, including that ratings "shall not be
affected" by ties to issuers, and what actually occurred.
"The court cannot find that all of these 'shalls' and 'must
nots' are the mere aspirational musings of a corporation setting
out vague goals," Carter said. "Rather, they are specific
assertions of current and ongoing policies that stand in stark
contrast to the behavior alleged by the government's complaint."
Citing other court decisions, S&P has argued that statements
about the integrity of its ratings constitute "puffery" that
cannot justify the government's fraud lawsuit.
The government sued under the Financial Institutions Reform,
Recovery and Enforcement Act, a 1989 law passed after the
savings and loan crisis that lets the government seek penalties
for losses affecting federally insured financial institutions.
An S&P spokeswoman declined to discuss Carter's ruling. A
Justice Department spokesman had no immediate comment.
Carter plans to issue a final ruling by July 15.
S&P's main rivals are Moody's Corp's Moody's
Investors Service and Fimalac SA's Fitch Ratings. They
have not been hit by federal lawsuits similar to the S&P case.
The case is U.S. v. McGraw-Hill Cos et al, U.S. District
Court, Central District of California, No. 13-00779.