New York-based credit ratings agency Standard & Poor's Ratings Services could enter into a settlement for more than $1 billion with the U.S. Department of Justice over the misrepresentation of mortgage-backed securities to investors before the end of the week, according to multiple media reports.
The settlement could total as much as $1.37 billion, according to some reports. The Department of Justice sued S&P for $5 billion in February 2013 alleging that the credit ratings agency "knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in collateralized debt obligations and residential mortgage-backed securities between 2004 and 2007. The suit also claims that S&P "falsely represented that its credit ratings of RMBS and CDO tranches were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P's analytical judgment."
S&P, a division of McGraw Hill Financial, issued ratings for more than $2.8 trillion worth of RMBS and nearly $1.2 trillion of CDO during the three-year period from September 2004 to October 2007, the complaint says. The case is scheduled to go to trial in September if a settlement is not reached.
The Department of Justice has already reached settlements with some of the nation's largest banks to resolve allegations that the lenders knowingly packaged and sold toxic mortgage-backed securities in the run-up to the financial crisis. JPMorgan Chase settled for then-record $13 billion in November 2013 and Bank of America agreed to a record $16.65 million settlement in August 2014. S&P is the first credit ratings agency to be sued by the Department of Justice's mortgage-backed securities group.
When reached by email, spokespeople for both S&P and the Department of Justice declined to comment on the possibility of a settlement. S&P has said the Justice Department's lawsuit is retaliation against the credit rater for downgrading the U.S. debt in 2011, an accusation that the Justice Department has denied. S&P claims the Justice Department did not sue the credit rater's competitors even though they gave the same securities the same ratings that S&P did.
As part of the pending settlement, S&P will not have to admit any wrongdoing, but will agree to a statement outlining its actions, according to reports.
S&P has not only been in trouble recently over its ratings of residential mortgage-backed securities, but commercial mortgage-backed securities as well. On January 21, S&P agreed to a $77 million settlement with the U.S. Securities and Exchange Commission to resolve claims of fraudulent misconduct regarding its ratings of CMBS.