S&P Says Trial on 163 Securities Sought by U.S. Is Unfair

McGraw Hill Financial Inc.’s Standard & Poor’s said it would be unfair to let the U.S. Justice Department put more than 150 selected securities before a jury to argue the firm’s ratings were the result of fraud.

S&P’s lawyer, John Keker, said at a hearing yesterday in federal court in Santa Ana, California, that if the case goes to trial, the company would want to show on a security-by-security basis that its credit rating was fair and equal to its competitor, Moody’s Corp.

“It’s complicated stuff, and if the government gets away with a hand-waving trial, S&P doesn’t stand a chance,” Keker said.

The Justice Department is seeking as much as $5 billion in civil penalties for losses to federally insured financial institutions that relied on S&P’s investment-grade ratings for mortgage-backed securities and collateralized-debt obligations, or CDOs.

U.S. District Judge David Carter said he has tentatively decided that the government complied with his earlier request to narrow the case. The U.S. identified 56 residential mortgage-backed securities and 107 CDOs that it will use at trial to try to prove S&P lied about its ratings being free of conflicts of interest.

Downplayed Risk

The government alleged in its Feb. 4 complaint against S&P that the firm knowingly downplayed the risk on securities before the credit crisis to win business from investment banks seeking the highest possible ratings to help sell the instruments. New York-based S&P has denied the allegations and said it has been singled out by the government because it was the only credit rater that downgraded U.S. debt. In August 2011, S&P downgraded the U.S.’s 60-year-running AAA credit rating to AA+ with a negative outlook.

The judge said he was never under the impression that the 26 securities listed in the government’s complaint were the only ones at stake in the case.

Carter said he’s concerned that S&P could be “outweighted” by the government and that the jury might take a “holistic” view of the Justice Department’s evidence to find S&P liable.

The Justice Department said in a Dec. 2 court filing that S&P was wrong to argue that each of the mortgage-backed securities or CDOs would “raise a host of deal-specific issues” that would need to be investigated before trial. The issue before the jury would be S&P’s conduct, according to the government.

“We’re not going to be just waiving our hands in the air,” Assistant U.S. Attorney George Cardona told the judge at the hearing.

The government wouldn’t have to prove under the applicable law that purchasers of the securities relied on the S&P ratings, only that they were fraudulent, Cardona said.

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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