On February 3, Attorney General Eric Holder announced that the Department of Justice and 19 states and the District of Columbia entered into a $1.375 billion settlement agreement with the rating agency Standard & Poor’s Financial Services LLC, along with its parent corporation McGraw Hill Financial Inc., to resolve allegations that S&P had engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The agreement resolves the department’s 2013 lawsuit against S&P, along with the suits of 19 states and the District of Columbia. Each of the lawsuits allege that investors incurred substantial losses on RMBS and CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. Other allegations assert that S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s business relationships with the investment banks that issued the securities.
The settlement is comprised of several elements. In addition to the payment of $1.375 billion, S&P has acknowledged conduct associated with its ratings of RMBS and CDOs during 2004 to 2007 in an agreed statement of facts. It has further agreed to formally retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decisions with regard to the credit of the United States. Finally, S&P has agreed to comply with the consumer protection statutes of each of the settling states and the District of Columbia, and to respond, in good faith, to requests from any of the states and the District of Columbia for information or material concerning any possible violation of those laws.
“This resolution provides further proof that the Department of Justice will vigorously pursue investigations and litigation, no matter how challenging, to protect the best interests of the American people,” said Acting Associate Attorney General Delery. “As part of the resolution, S&P admitted facts demonstrating that it misrepresented itself to investors and the public, allowing the pursuit of profits to bias its ratings. S&P also agreed to retract its unsubstantiated claim that this lawsuit was initiated in retaliation for the decisions S&P made about the credit rating of the U.S. government. Today’s announcement is the latest result of our dedicated effort to address misconduct of every kind that contributed to the financial crisis.”
Half of the $1.375 billion payment – or $687.5 million – constitutes a penalty to be paid to the federal government and is the largest penalty of its type ever paid by a ratings agency. The remaining $687.5 million will be divided among the 19 states and the District of Columbia. The allocation among the states and the District of Columbia reflects an agreement between the states on the distribution of that money.
“S&P played a central role in the crisis that devastated our economy by giving AAA ratings to mortgage-backed securities that turned out to be little better than junk,” said Acting U.S. Attorney Yonekura. “Driven by a desire to increase profits and market share, S&P blessed innumerable securitization that were used by aggressive lenders to offload the risks of billions of dollars in mortgage loans given to homeowners who had no ability to pay them off. This conduct fueled the meltdown that ultimately led to tens of thousands of foreclosures in my district alone. This historic settlement makes clear the consequences of putting corporate profits over honesty in the financial markets.”