Illinois sues S&P over ratings, alleges fraud

Thu Jan 26, 2012 2:37am IST

The Standard and Poor's building in New York, August 2, 2011. REUTERS/Brendan McDermid/Files

The Standard and Poor's building in New York, August 2, 2011.

Credit: Reuters/Brendan McDermid/Files

Related Topics



REUTERS - Standard & Poor's has been sued by Illinois' attorney general, who accused it of fueling the nation's housing and financial crises by assigning inflated credit ratings to risky mortgage-backed securities.

Attorney General Lisa Madigan said the McGraw-Hill Cos Inc MHP.N unit, in a drive to boost market share, committed fraud and compromised its independence by issuing tainted, often "AAA" ratings to curry favor with Wall Street banks that created the securities.

"S&P was making hundreds of millions of dollars a year rating these deals," Madigan said in a telephone interview. "Without the rating agencies as enablers, none of these securities would have been able to be purchased by many investors."

The lawsuit accuses McGraw-Hill and S&P of violating state consumer fraud and deceptive trade practices laws. It seeks to recover profits derived from alleged inflated ratings, plus a $50,000 civil fine for each violation.

David Wargin, an S&P spokesman, said: "The case is without merit, and we will defend ourselves vigorously."

S&P and its main rivals, Moody's Corp's (MCO.N) Moody's Investors Service and Fimalac SA's (LBCP.PA) Fitch Ratings, have long faced investor and regulatory criticism over their ratings for structured securities that later proved toxic.

These agencies are typically paid by issuers whose securities they rate. Critics say this creates a conflict of interest, and causes issuers to shop for the best ratings.

Moody's and Fitch are not targets of Wednesday's lawsuit, which was filed in a Cook County state court.

"Our investigation is ongoing with respect to other players in the marketplace that may have contributed to the collapse," Madigan said.


Illinois' complaint accused S&P of "systematically misrepresenting that its credit analysis of structured finance securities was objective, independent and not influenced by either S&P's or its clients' financial interests."

It quotes several internal S&P communications, including a widely quoted 2007 instant message by an analyst: "It could be structured by cows and we would rate it."

Madigan said Illinois' case has become stronger as more evidence has come to light.

"S&P will publicly say at every opportunity that its ratings are objective and independent," she said. "But when you see what they were talking about at work, it was: 'How do we retain this client, how do we give this deal a higher rating, and how do we make more money for this company?'"

S&P, Moody's and Fitch in September won the dismissal of a lawsuit in which Ohio pension funds claimed to have lost $457 million because of inflated ratings.

That case had been brought by Richard Cordray, formerly Ohio's attorney general and now director of the federal Consumer Financial Protection Bureau.

Connecticut settled its own lawsuit against the agencies over ratings in October.

This month, the Government Accountability Office urged U.S. securities regulators to more vigorously explore ways to reduce potential conflicts for credit rating agencies.

The U.S. Securities and Exchange Commission is conducting a study required by the 2010 Dodd-Frank financial reform law that explores how best to pay the agencies.

In late afternoon trading, McGraw-Hill shares were up 74 cents, or 1.6 percent, at $47.27 on the New York Stock Exchange.

The case is Illinois v. McGraw-Hill Cos et al, Cook County Circuit Court, No. 12CH02535.

(Reporting By Jonathan Stempel; Editing by John Wallace, Tim Dobbyn and Gerald E. McCormick)


After wave of QE, onus shifts to leaders to boost economy

DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.

Earnings Season

Reuters Showcase

Obama In India

Obama In India

In parting shot, Obama prods India on religious freedom.  Full Article 

Market Rally

Market Rally

Sensex, Nifty hit record high for fifth straight session.  Full Article 



Max India to be split into three separate companies.  Full Article 

India’s Male Tenor

India’s Male Tenor

India’s lone male tenor wants to ‘Indianise’ opera  Full Article 

Indian Equities

Indian Equities

Hornbill raising $250 mln to invest in equities - partner.  Full Article 

Ratings Downgrade

Ratings Downgrade

S&P downgrades Russia's sovereign credit rating to "junk".  Full Article 

Facebook Outage

Facebook Outage

Facebook takes blame for service outages, which hit wider Web.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage