S&P Wins Bid to See U.S. Documents Behind Fraud Lawsuit
Standard & Poor’s will be allowed to see government documents relating 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. (MHFI) unit won a court ruling forcing the government to hand over potential evidence 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 it’s too early in the case’s pretrial evidence-sharing phase.
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.”
Ellen Canale, a spokeswoman for the Justice Department, said officials are reviewing the judge’s order.
The judge also directed the government to provide S&P with documents related to the objectivity and independence of other rating agencies, as well as documents related to mortgage lenders, financial institutions and issuers of the securities at issue. The Justice Department had argued many of these documents are privileged investigative files.
“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 and said that a trial for all 158 securities that the Justice Department has identified as the basis for its fraud claims would be unmanageable.
The judge has said he wants the trial to start in September 2015.
The case is U.S. v. McGraw-Hill Cos., 13-779, U.S. District Court, Central District of California (Santa Ana).
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