JURIST - Paper Chase: Italy prosecutors charge credit-rating agencies with manipulating market

[JURIST] Italian prosecutors on Monday filed suit against five former employees of Standard and Poor's (S&P) and two former employees of Fitch [corporate websites] for allegedly manipulating the market and abusing privileged information that led to the rating agencies' downgrades of Italy. Though magistrates in Rome and Milan have refused to support the claim, prosecutors from the southern town of Trani contend that the agencies failed to respect European rules of transparency [Reuters report]. Specifically, they allege that S&P and Fitch reports regarding Italy's banking system were inaccurate and that one such report caused drastic losses in the Italian market after it was leaked during market hours [Corriere della Sera report, in Italian] on May 20, 2011. S&P denied the allegations [Corriere della Sera report, in Italian] on Monday while Fitch has yet to issue a response. Charges against Moody's [corporate website], a peer rating agency, were recently dropped after prosecutors conceded that there was a lack of evidence proving a manipulation of the market. This is the first European court case related to a nation's rating cuts.

Rating agencies have received consistent criticism for not predicting the subprime mortgage debt crisis of 2008 and 2009. In general, many European policymakers contend that the agencies were too quick to downgrade EU nations in the face of various bailouts and austerity programs. In a procedural ruling last week, the Illinois Circuit Court of Cook County [official website] ruled that the state's attorney general may proceed [WSJ report] with a case accusing S&P of misleading investors during the financial crisis. Also last week, an Australian court ruled that S&P did mislead investors [AP report] when it gave its highest investment rating to risky securities just before the global financial crisis. In August 2011, S&P received considerable criticism from American policy makers [CBS News report] after the agency downgraded the US credit-rating from AAA to AA+.