New York-based credit ratings agency Standard & Poor's Ratings Services and its parent company, McGraw Hill Financial, have entered into settlements with the U.S. Department of Justice and Attorneys General of 19 states and the District of Columbia over claims that S&P misrepresented residential mortgage-backed securities and collaterized debt obligations to investors, according to a release from McGraw Hill on Tuesday morning.
As part of the settlement, which is not subject to court approval, McGraw Hill agreed to pay $687.5 million to the Department of Justice and a combined $687.5 million to the states and the District of Columbia. The combined total of the settlements is $1.375 billion. Neither McGraw Hill nor any of its subsidiaries were found guilty of any wrongdoing or violation of the law as part of the settlement.
"The settlement agreement states that all parties, including the Company (McGraw Hill Financial), the DOJ, and the states, settled this matter 'to avoid the delay, uncertainty, inconvenience, and expense of further litigation,'" McGraw Hill said in the release. "After careful consideration, the Company determined that entering into the settlement agreement is in the best interests of the Company and its shareholders and is pleased to resolve these matters. . .The Company and S&P Ratings take compliance with regulatory obligations very seriously and continue to make investments in people and technology to strengthen controls and risk management throughout the organization."
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 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, according to the complaint.
According to an announcement from the Department of Justice, S&P has agreed to formally retract public statements the Company made to the effect that it believed the DOJ's suit was filed in retaliation for the company's downgrading of U.S. credit in 2011.
"On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised," Attorney General Eric Holder said. "As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business. While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression."
S&P is the first credit ratings agency to be sued by the Department of Justice's mortgage-backed securities group. The DOJ has already reached record settlements with JPMorgan Chase ($13 billion in November 2013) and Bank of America ($16.65 billion in August 2014) over claims of packaging and selling toxic mortgage-backed securities in the run-up to the financial crisis.
McGraw Hill also announced a separate settlement on Tuesday with the California Public Employees' Retirement System for $125 million to resolve claims made by the system against McGraw Hill over ratings of three structured investment vehicles. That brings Tuesday's settlement total for McGraw Hill to $1.5 billion.
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.