The US government has launched a civil lawsuit against credit ratings company Standard & Poor’s and its parent The McGraw-Hill Companies Inc over mortgage bond ratings, the first Federal enforcement action against a credit rating agency over alleged illegal behaviour tied to the recent financial crisis.
The government said in a court filing that it was seeking civil money penalties from S&P and McGraw Hill.
“Considerations regarding fees, market share, profits, and relationships with issuers improperly influenced S&P’s rating criteria and models,” the government said.
Shares of McGraw-Hill plunged 13.8% on Monday after the company said it was expecting the lawsuit, marking their biggest one-day percentage decline since the 1987 stock market crash.
The news also caused shares of Moody’s, S&P’s main rival, to slide 10.7%.
It is unclear why regulators are focussing on S&P and ignoring Moody’s and Fitch Ratings.
S&P, Moody’s and Fitch have long faced criticism from investors, politicians and regulators for assigning high ratings to thousands of sub-prime and other mortgage securities that quickly turned sour.
“This lawsuit is significant because it could augur future government action or, even worse for the agencies, more litigation by investors,” said Jeffrey Manns, a law professor at George Washington University in Washington, DC.
The New York Times reported that talks between the justice department and S&P broke down last week after the government sought a settlement of more than $1 billion.
“A DOJ (department of justice) lawsuit would be entirely without factual or legal merit,” S&P said. “The DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.”
McGraw-Hill had acknowledged last July that the Justice Department and SEC were probing potential violations by S&P, and that it was in talks to try to avert a lawsuit.