JURIST - Paper Chase: Credit rating agency sued for inflating credit ratings during housing crisis

[JURIST] The US Department of Justice (DOJ) [official website] on Monday filed a lawsuit [complaint, PDF; press release] against credit rating agency Standard and Poor's (S&P) [corporate website] for the misrepresentation of the credit risk of complex financial products. S&P assessed the credit risk of structured financial instruments, such as residential mortgage backed securities (RMBSs) and collateralized debt obligations (CDO), and assigned securities with ratings that described the associated risk. The complaint alleges that these ratings were inflated when they were relied upon by investors including many federally insured financial institutions. Further, the DOJ alleged that "S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P's relationships with investment banks when, in actuality, S&P's desire for increased revenue and market share led it to favor the interests of these banks over investors." A key claim in the complaint is that the ratings are purchased by the institutions holding the securities under review, creating an alleged conflict of interest.

This is the first civil lawsuit by the DOJ against a credit rating agency following the 2008 housing crisis and resulting economic collapse. However, other federal agencies have filed lawsuits and amended regulations in the wake of the collapse. In January the National Credit Union Administration (NCUA) [official website] filed a lawsuit [JURIST report] against JPMorgan Chase &Co.for the sale of $2.2 billion of faulty RMBSs to credit unions. In June 2011 JPMorgan settled [JURIST report] at $153.6 million for fraud charges brought by the Securities and Exchange Commission (SEC) [official website] for misleading investors during the housing crises. In December 2008 the SEC approved rule amendments [JURIST report] that provided greater oversight and regulation of credit rating agencies.