Standard & Poor’s Financial Services (S&P) and its parent company, McGraw-Hill Financial Inc., agreed to resolve federal and state civil claims related to S&P’s conduct in inflating ratings of residential mortgage-backed securities and structured investment vehicle notes.
Attorney General Kamala D. Harris, along with the U.S. Department of Justice and the attorneys general of 18 states and the District of Columbia, announced the settlement for which S&P will pay a total of $1.5 billion to federal and state government entities. The State of California, through Attorney General Harris’ office, will recover $210 million in damages, from which the California Public Employees Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) will receive allocations for their losses on investments of certain S&P-rated securities. Separately, S&P will also pay CalPERS $125 million to settle CalPERS’ specific lawsuit.
An investigation conducted by Attorney General Harris showed that S&P systematically misrepresented to the public, and to CalPERS and CalSTRS, that its ratings of structured finance securities were based on an objective and reliable analysis and not influenced by S&P’s economic interests. As part of the settlement, S&P agreed to a statement of facts which indicate that, despite its claims of objectivity and independence, it overruled the recommendations of its ratings experts out of concern that S&P’s business would be harmed if the company did not rate its clients’ securities positively. The settlement does not absolve S&P or its employees from any possible criminal charges.
In its own lawsuit, CalPERS sued for losses it sustained from investments in three structured investment vehicles that collapsed during the financial crisis. The settlement with S&P does not resolve the same charges against Moody’s Investors Service in that case.
Last month, the Securities and Exchange Commission (SEC) announced a series of federal securities law violations by S&P involving fraudulent misconduct in its ratings of certain commercial mortgage-backed securities. S&P agreed to pay more than $58 million to settle the SEC’s charges, plus an additional $19 million to settle parallel cases announced by the New York Attorney General’s office ($12 million) and the Massachusetts Attorney General’s office ($7 million).