Standard & Poor’s will be allowed to see government documents related to the U.S. Justice Department’s decision last year to sue the rating company and not its competitors for issuing allegedly fraudulent ratings.
The McGraw Hill Financial Inc. unit won a court ruling forcing the government to hand over potential evidence, which the Justice Department has said is privileged information, for its defense that the lawsuit was retaliation for S&P’s downgrade of U.S. debt two years earlier.
U.S. District Judge David Carter in Santa Ana, California, stopped short of giving the company access to records of White House communications around the time S&P issued the downgrade, saying he held a decision on those documents “in abeyance” at this stage of pretrial evidence-sharing.
The Justice Department is seeking as much as $5 billion in civil penalties from S&P for alleged losses to federally insured financial institutions who relied on its investment-grade ratings of residential mortgage-backed securities and collateralized debt obligations whose value evaporated with the collapse of the U.S. housing market.
The Justice Department claims S&P’s ratings were not objective and independent, as it told investors, but rather driven by desire to win business from the issuers of the securities who paid the company’s fees. S&P has denied the allegations and has said it gave the same ratings to the relevant securities as Moody’s Corp.
“For now, the government must produce those documents that are related to the selective-prosecution claim but are not protected by the privileges that specially attach to the Executive Office of the President,” Carter said in today’s order. “Only after such discovery is propounded and considered, will the court entertain a renewed motion to compel the production of documents from the Executive Office of the President.”
S&P has argued that a phone call by then-Treasury Secretary Timothy Geithner to Harold McGraw III, the McGraw-Hill chairman, days after the Aug. 5, 2011, downgrade of the U.S. debt is evidence the lawsuit was retaliation.
Geithner told McGraw that S&P’s action “would be looked at very carefully,” according a statement McGraw filed in court. Geithner made the call minutes after he met with President Barack Obama, according to Treasury Department calendar minutes that S&P filed in court.
The evidence of discriminatory intent was circumstantial but sufficient, Carter said.
“Secretary Geithner’s statements are susceptible to several interpretations and it is unclear whether there is a nexus between his displeasure and the Department of Justice’s litigation decisions,” the judge said. “But, such open questions are properly answered after, not before, discovery.”
Ellen Canale, a spokeswoman for the Justice Department, said officials are reviewing the judge’s order.
The Justice Department has denied the lawsuit was motivated by the downgrade.
The judge also directed the government to provide S&P with its findings related to the objectivity and independence of other ratings firms, as well as documents related to its investigations of mortgage lenders, financial institutions and issuers of the securities at issue. The Justice Department had argued many of these documents are privileged.
“None of the government’s grounds for withholding production are availing,” Carter said. “In short, the government’s obligation to produce documents is commensurate with the government’s election to bring a suit of such broad scope and magnitude.”
A sealed statement by a prosecutor in support of keeping certain documents from being shared with S&P was too general and sweeping, the judge said. The statement was prepared by John Walsh, the U.S. attorney in Denver and the co-chairman of the Justice Department’s Residential Mortgage-Backed Securities Working Group.
The government would need to identify specific records and explain why they can’t be shared, the judge said.
“We are pleased that the court granted our discovery request and has compelled the DOJ to provide the information S&P needs to fully defend against these meritless claims,” Edward Sweeney, a spokesman for New York-based S&P, said in an e-mail.
Carter denied S&P’s request to split the trial on the government claims into two parts.
The company had asked the judge to limit the initial trial to 17 collateralized-debt obligations for which Citigroup Inc. allegedly sustained losses. S&P has said a trial for all 158 securities that the Justice Department has identified as the basis for its fraud claims would be unmanageable.
Both sides have a agreed to a tentative trial date of Sept. 29, 2015.
The case is U.S. v. McGraw-Hill Cos., 13-779, U.S. District Court, Central District of California (Santa Ana).