S&P Seeks Dismissal of $5bn Crisis Ratings Lawsuit
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Credit ratings agency Standard and Poor’s has asked a U.S. federal judge to dismiss a lawsuit that claims the firm gave inaccurately high ratings to risky mortgage investments, deepening the battle over who bears responsibility for losses suffered by investors during the financial crisis.
Credit ratings agency Standard and Poor’s has asked a U.S. federal judge to dismiss a lawsuit that claims the firm gave inaccurately high ratings to risky mortgage investments, deepening the battle over who bears responsibility for losses suffered by investors during the financial crisis.
The U.S. Justice Department in February brought its claims under the Financial Institutions Reform, Recovery and Enforcement Act, which allows it to seek civil penalties for fraud affecting federally insured financial institutions. The government is seeking more than $5 billion in damages.
On Monday, S&P issued a formal response to the claims, arguing that the government’s case “appears to be a stretch” and points out that other agencies had also issued ratings identical to S&P.
“If the government’s case appears to be a stretch, that is because it is. 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 ratings firm said in court papers.
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The 2007-2009 financial crisis was due in large part to massive losses trigged by risky mortgage loans packaged and sold to investors, often with top ratings from credit assessors.
However, agencies such as S&P have escaped most liability for its ratings, since the U.S. justice system largely protects them as opinions under free speech laws.
The lawsuit however is one of the most ambitious the government has filed in response to the crisis, and accuses S&P of defrauding investors and financial institutions under the pretext of “objective, independent (and) uninfluenced” analysis.
Citing meetings, messages and internal memos, the Justice Department said S&P knowingly inflated its ratings because it wanted to gain a bigger market share and earn more business from its lender clients whose investments it was hired to assess.
But S&P on Monday pointed to two earlier court decisions where judges ruled that statements about the firm’s objectivity and independence were “mere puffery” and cannot therefore constitute the basis for a fraud claim.
Lawyers say S&P would probably be unsuccessful in dismissing the lawsuit because it cannot provide evidence to contradict the allegations. At best, it can only argue that the Justice Department will never be able to prove its civil fraud claims even if all the facts alleged in the complaint are true.
“I doubt this case is going to trial,” said Neil Kaufman, chairman of the corporate department at Abrams Fensterman. “I think the government is looking for a scapegoat,” he said, predicting that the company will eventually reach a settlement with the government.
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