WASHINGTON (2/6/13)--Noting losses at Western Corporate FCU and other investors, the Department of Justice filed a lawsuit Monday against Standard & Poor's Financial Services LLC (S&P), alleging that S&P committed fraud in rating residential mortgage-backed securities(RMBS) and collateralized debt obligations (CDOs) in the years leading up to the financial crisis.
The suit against S&P and its parent, McGraw-Hill Companies Inc., was filed in the U.S. District Court for the Central District of California, Los Angeles. It alleges that S&P issued inflated ratings that misrepresented the securities' true credit risks.
The complaint also alleges that S&P falsely represented that its ratings were objective, independent and uninfluenced by its relationships with investment banks, and that its desire for increased revenue and market share led it to favor the interests of those banks over investors.
In announcing the lawsuit, Attorney General Eric Holder said the Central District of California is "home to the now-defunct [WesCorp], which was the largest corporate credit union in the country. Following the 2008 financial crisis, WesCorp collapsed after suffering massive losses on RMBS and CDOs rated by S&P."
U.S. Attorney Andre Birotte Jr. of the Central District of California said that in addition to huge numbers of homeowners with subprime mortgage loans affected in his seven-county district, "institutional investors located in my district, such as WesCorp, suffered massive losses after putting billions of dollars into RMBS and CDOs that received flawed and inflated ratings from S&P."
The complaint includes a list of 76 CDOs as examples of investments that went bad. Eleven were sold to WesCorp and 26 were sold to Eastern Financial Florida CU. Banks receiving the listed CDOs included Citibank, which received 22 on the list; Bank of America, eight; M&T Bank, seven, and First Midwest, 11.
The suit seeks civil penalities under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) based on three forms of alleged fraud: mail fraud, wire fraud, and financial institution fraud.
The complaint says that from 2004 to 2007, S&P was so concerned with possibly losing market share and profits that it limited, adjusted and delayed updates to the ratings criteria and analytical models it used to assess credit risks in CDOs and RMBS. It allegedly weakened those criteria and models from what its analysts believed was necessary to make the ratings more accurate, and from March to October 2007, it allegedly inflated ratings on hundreds of billions of dollars' of CDOs. Nearly every CDO it rated during the period failed.
Joining in the announcement were attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Indiana, Iowa and Mississippi, who have filed or will file similar civil fraud suits against S&P. In the past three years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,900 mortgage fraud defendants.