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RMBS Suit Filed by S&P Investors is Denied Revival by U.S. Supreme Court

gavel-fiveThe U.S. Supreme Court recently decided to deny the revival of a suit involving allegedly false statements made about toxic mortgage-backed securities by Standard & Poor’s (S&P) rating agency.

Boca Raton Firefighters & Police Pension Fund accused S&P’s parent company McGraw-Hill Financial CEO Harold McGraw III and former CFO Robert Bahash of breaking federal law by convincing investors that their credit ratings were accurate, according to court documents and a media report.

Ultimately, the judge determined that the court system “will not credit mere business ‘puffery,’ which we have defined in this context as ‘statements [that] are too general to cause a reasonable investor to rely upon them.’”

The suit, brought about by the pension fund shareholders in February 2013, stemmed from information given from a lawsuit by the U.S. Department of Justice (DOJ) over S&P’s alleged role in the financial crisis. A district judge refused to revive the case in September 2013 based on allegations by the DOJ, saying that the outcome of the case would not have been changed by new information brought up about representations made by S&P to investors. The judge had previously found a lack of proof that S&P knowingly made false statements about the securities it rated. The Second Circuit Court affirmed the District Court’s decision in February and refused to grant the plaintiffs a rehearing, according to the report.

S&P agreed to pay the DOJ $1.375 billion dollars to settle the financial crisis accusations in February 2015, according to the report.

On July 20, 2015, the plaintiffs filed a petition for a writ of certiorari with the country’s highest court, claiming the lower court did not weigh the context of S&P’s statements about certain mortgage-backed securities before the crisis. The writ questioned “whether a verifiably false factual statement about a matter of obvious importance to a company can nevertheless constitute inactionable ‘puffery’ under the federal securities laws.”

According to the court documents, between October 21, 2004 and March 11, 2008, S&P rated structured finance transactions including residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs). S&P rated approximately 10,000 RMBS in 2006 and 2007 alone.

The investors noted in the writ that “as the quality of the underlying housing loans declined and the RMBS and CDO products increasingly bundled “junk” loans, S&P intentionally adjusted its ratings models to rate those securities as AAA and investment grade in order to preserve and increase its market share.”

McGraw-Hill representatives nor the investors responded to requests for comment.

The suit clearly did not affect operations at McGraw-Hill, as their third quarter earnings statement released Tuesday reflected a 5 percent increase in revenue to $1.32 billion compared to last year.

"The performance in the quarter demonstrates the balance across the portfolio as the Company continued to deliver solid revenue growth, margin expansion and adjusted EPS growth during the third quarter despite a significant decline in global bond issuance," said Douglas L. Peterson, president and CEO of McGraw Hill Financial.

He added, "This year's margin expansion is the result of top-line growth and a concerted focus across the Company to deliver on our productivity targets. As we look to continue to build shareholder value, we are ever more excited with the addition of SNL and the synergy potential with S&P Capital IQ and Platts to create an offering that is distinctive and essential to the global financial markets. Lastly, we remain committed to actively repurchasing our shares–having repurchased 4.9 million shares in the last nine months.”

About Author: Xhevrije West

Xhevrije West is a talented writer and editor based in Dallas, Texas. She has worked for a number of publications including The Syracuse New Times, Dallas Flow Magazine, and Bellwethr Magazine. She completed her Bachelors at Alcorn State University and went on to complete her Masters at Syracuse University.

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