S&P's Retaliation Claim Against Government Gets Hearing

S&P's Retaliation Claim Against Government Gets Hearing Photo via Wikimedia Commons Former U.S. Treasury Secretary Tim Geithner

A federal judge in California will hear arguments on Tuesday about whether to grant discovery involving evidence allegedly indicating the U.S. Department of Justice filed its $5 billion lawsuit against Standard & Poor’s Financial Services LLC in retaliation for its downgraded credit rating of the United States.

S&P, the only ratings agency that downgraded the country’s credit rating during one of its debt-ceiling crises—and the only agency the Justice Department sued over its valuation of mortgage-backed securities—has argued that the suit violates its First Amendment free speech rights.

In support of that argument, S&P has subpoenaed former Treasury Secretary Tim Geithner over a telephone call he made to Harold McGraw, the head of S&P’s parent corporation, McGraw Hill Financial Inc., three days after the Aug. 5, 2011, downgrade.

According to an affidavit provided by McGraw, Geithner told him, “You have done an enormous disservice to yourselves and to your country,” and that S&P’s conduct would be “looked at very carefully.” Such behavior, Geithner said, would require a response by the government, according to McGraw’s affidavit.

Geithner has moved to quash S&P’s subpoena, which “has made no showing of any relationship between Secretary Geithner’s asserted unhappiness with the S&P downgrade of the United States’ credit rating and the decisions by the Department of Justice … to investigate S&P’s conduct and ultimately to bring this lawsuit,” Geithner’s attorney, Daniel Murphy, chairman of the litigation department at Loeb & Loeb in Los Angeles, said in a March 3 motion.

In a response filed Thursday, S&P has insisted the case provides the “exceptional circumstances” that warrant discovery of sitting and former government officials, like Geithner, who resigned last year.

S&P attorney Floyd Abrams, a partner at New York’s Cahill Gordon & Reindel, did not return a call for comment. The company issued a statement through spokesman Ed Sweeney: “The timing and sequence of communications within the Executive Branch upon S&P’s downgrade of the United States’ credit rating provides a strong basis to pursue discovery on our retaliation defense and the United States’ decision then to pursue its case only against S&P.”

Thom Mrozek, spokesman for the U.S. attorney’s office in Los Angeles, which brought the case, and Geithner’s attorneys, Murphy and John Kiernan, co-chairman of the litigation department at New York’s Debevoise & Plimpton, declined to comment.

U.S. District Judge David Carter in Santa Ana, Calif., will hear arguments over the motion.

The Justice Department’s suit, filed last year, accuses S&P of misrepresenting to investors the integrity of its ratings of high-risk securities in advance of the 2008 credit crisis. Carter refused to dismiss the case on July 16, concluding that S&P’s statements to consumers were not mere “puffery.”

On Jan. 20, as part of the discovery process, S&P moved to compel the Justice Department to turn over certain materials, including information related to its retaliation claim.

According to McGraw’s affidavit, Terrence Checki, then executive vice president of the Federal Reserve Bank in New York, called him two days after the downgrade to say that Geithner “was very angry at S&P.” Geithner called the next day following a meeting with President Obama, according to S&P’s motion.

Checki, also subpoenaed, noted that he never “threatened a lawsuit or other official action against the ratings agency” in his phone call. Murphy and Kiernan, who also represent him, declined to comment.

The Justice Department’s Feb. 17 opposition papers call S&P’s discovery requests “overbroad” and “irrelevant,” noting that its investigation began before the downgrade. The subpoenas also would involve senior officials at the White House, even Obama, who enjoys greater protection from such discovery requests, assistant U.S. attorney George Cardona in Los Angeles wrote.

Contact Amanda Bronstad at abronstad@alm.com.

Note: This article was updated at 9:55 a.m. on Tuesday.

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