McGraw-Hill Cos.’s Standard & Poor’s unit urged a federal judge to throw out the U.S. Justice Department’s allegations that the company’s mortgage-backed securities ratings were fraudulent.
S&P said in a filing yesterday in federal court in Santa Ana, California, that government lawyers overreached in their attempt to target the company. S&P issued credit ratings identical to those given by its competitors for the securities that are at issue in the government’s civil complaint, according to the filing.
“If the government’s case appears to be a stretch, that is because it is,” the company said. “S&P’s inability, together with the Federal Reserve, Treasury and other market participants, to predict the extent of the most catastrophic meltdown since the Great Depression reveals a lack of prescience but not fraud.”
The U.S. said in its Feb. 4 complaint that S&P knowingly and intentionally defrauded investors in residential mortgage-backed securities and collateralized-debt obligations that included those securities for which the company provided credit ratings. Justice Department officials said in February they may seek more than $5 billion in civil penalties from S&P.
The government alleged 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.
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.
S&P said in yesterday’s filing that its public statements regarding its ratings being objective, independent and uninfluenced by conflicts of interest, which were cited in the government’s complaint, can’t form the basis of fraud allegations.
A federal appeals court in New York recently 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,’” according to the company’s filing.
In addition, S&P argued, federal officials haven’t sufficiently pleaded, as they are required to by law, that its credit ratings were objectively false or subjectively disbelieved by S&P when they were issued.
“The government cannot claim that an alleged dispute among employees satisfies its obligation to plead with particularity that the ratings were not S&P’s true opinion,” the company said. “Internal squabbles about appropriate rating methodology are insufficient to establish that a particular rating is ‘false’ or ‘not believed’ by the rating agency.”
S&P is unlikely to have the entire case dismissed at this stage, John Hueston, a former federal prosecutor now with Irell & Manella LLP in Los Angeles, said in a phone interview before the ratings company filed its request.
Even if U.S. District Judge David Carter would dismiss part of the government’s allegations, he would likely give the Justice Department a chance to remedy the deficiencies found in the complaint, Hueston said.
Thom Mrozek, a spokesman for U.S. Attorney Andre Birotte Jr. in Los Angeles, declined to comment on S&P’s filing.
McGraw-Hill fell the most in 25 years following the government’s lawsuit. It’s shares had surged 51 percent through the beginning of February from September 2011, when it bent to pressure from Jana Partners LLC and the Ontario Teachers’ Pension Plan with a proposal to spin off the deteriorating education business.
The Justice Department probe, code-named “Alchemy,” began in November 2009. The suit marked the culmination of a “massive, multiyear investigation” by a team of almost two dozen lawyers, Stuart Delery, principal deputy assistant attorney general, said in February.
The collapse in value of securities that packaged home loans from the riskiest borrowers led to a credit seizure starting in 2007 that sent the world’s largest economy into its longest recession since 1933 as defaults soared and home values plummeted.
S&P is also contending with 18 lawsuits from state attorneys general and the District of Columbia over ratings. The company has moved 17 of the cases to federal court and is seeking to consolidate them, arguing the cases are based on the same allegations and that it’s more efficient to consider them together for pretrial proceedings.
The case is U.S. v. McGraw-Hill, 13-cv-00779, U.S. District Court, Central District of California (Santa Ana).