Standard & Poor’s assurances to investors that its credit ratings were free of conflicts of interest amounted to fraudulent representations rather than “mere puffery,” the Justice Department said.
The U.S. filed its response today to a request by the McGraw Hill Financial Inc (MHFI).-owned rating company to dismiss civil claims that it knowingly and intentionally defrauded investors in residential mortgage-backed securities, and in collateralized-debt obligations that included those securities.
“It would no doubt come as some surprise to many, RMBS and CDO investors, regulators, and legislators among them, that S&P’s repeated assurances that its ratings were objective, independent, and uninfluenced by any conflict of interest were mere puffery,” the Justice Department said in its filing in federal court in Santa Ana, California.
S&P, based in New York, had said in its April 22 request to dismiss the government’s lawsuit that its public statements about its ratings being free of conflicts of interest couldn’t form the basis of fraud allegations.
The company cited in its request a recent ruling by a federal appeals court in New York. That court found in a case brought by a Florida pension fund against S&P that “statements concerning the ‘integrity and credibility and the objectivity of S&P’s credit ratings’ were exactly ‘the type of mere puffery’ that we have previously held to be not actionable.’”
In today’s filing, the Justice Department said that S&P’s assurances to investors were not “outrageous generalized statements” that were so exaggerated that no one could be expected to rely on them. Rather, they were specific assertions about S&P’s policies and procedures concerning the separation of its analytical work and its business interests, the U.S. said.
Catherine Mathis, an S&P spokeswoman, had no immediate comment on the Justice Department’s filing.
The government alleged in its Feb. 4 lawsuit that S&P lied about its ratings being free of conflicts of interest because it downplayed or disregarded credit risks to win more business from investment banks and other issuers of the securities that paid the company to provide the ratings and that sought the highest possible ratings.
Banks create collateralized debt obligations by bundling bonds or loans into securities of varying risk and return. They pay ratings firms for the grades, which investors may use to meet regulatory requirements.
In its 119-page complaint, the Justice Department cited meetings, messages and memos that it said showed S&P analysts assigned investment-grade ratings to securities based more on a desire to win business than to be accurate.
The case is U.S. v. McGraw-Hill Cos., 13-cv-00779, U.S. District Court, Central District of California (Santa Ana).
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