Declarations of objectivity and integrity that Standard & Poor’s Financial Services LLC made regarding its ratings of collateralized debt obligations and other mortgage-backed securities just before the 2008 financial collapse were not mere "puffery," Justice Department lawyers have argued in their lawsuit against the agency.
In fact, S&P was aware that ratings it presented as objective and independent in fact were false and misleading and that the values it attached to the securities at issue were inflated, government lawyers said in a court document filed this week.
"It would no doubt come as some surprise to many…that S&P’s repeated assurances that its ratings were objective, independent, and uninfluenced by any conflict of interest were ‘mere puffery,’ entitled to no more weight than an infomercial hawker’s claim that his knife will outlast any other," assistant U.S. attorney George Cardona in Los Angeles wrote. The complaint’s "allegations, read in their totality, demonstrate an overall course of conduct by S&P intended to mislead investors…about the manner in which S&P produced its ratings and the influence issuers had on those ratings."
A hearing on the dismissal motion is scheduled for July 8.
When asked to comment, Catherine Mathis, senior vice president of marketing and communications at Standard & Poor’s Rating Services, which is owned by McGraw-Hill Companies Inc., said via email, "We look forward to having our motion heard by the court."
Thom Mrozek, a spokesman for the U.S. attorney’s office in Los Angeles, declined to comment.
The Justice Department filed its suit — the first by the federal government against a ratings agency — on February 4 in federal court in Los Angeles, seeking penalties under the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
S&P moved to dismiss the case on April 22, arguing that the statements of its officials were never intended to be more than "puffery" — essentially, exaggerated praise. John Keker of San Francisco’s Keker & Van Nest, argued that the complaint "overreaches" by laying the blame for the recession on S&P, whose ratings were identical to other agencies’.
"If the Government’s case appears to be a stretch, that is because it is," he wrote. "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."
S&P also cited a December 20 opinion by the U.S. Court of Appeals for the Second Circuit upholding dismissal of a securities fraud lawsuit filed against it by a Florida pension fund. Many of the alleged misstatements at issue in that case, Boca Raton Firefighters and Police Pension Fund v. Bahash, are repeated in the Justice Department’s lawsuit, Keker wrote.
S&P disputed the Justice Department’s contention that the agency knew some of its CBO ratings did not reflect its true opinion at the time, calling alleged squabbles within its office part of a "robust debate."
Justice Department lawyers, in their response filed on Monday, refuted that contention. They claimed that "S&P knew that the models and criteria that affected every CDO S&P rated had been watered down to further S&P’s financial interests, acceding to issuer demands to minimize credit support requirements."
They argued that the Second Circuit case cited by S&P dealt with shareholders, not investors who relied its ratings to purchase CBOs and mortgage-backed securities.
Separately, S&P has moved to coordinate related actions filed by 17 state attorneys general into federal multidistrict litigation. The U.S. Judicial Panel on Multidistrict Litigation is expected to take up the coordination request at its hearing on May 30 in Louisville, Ky.
Contact Amanda Bronstad at firstname.lastname@example.org.