DoJ Sues Standard & Poors, Alleges Agency Whitewashed Subprime Securities

Holder: $5 Billion in Damages from S&P Ratings (MarketWatch)

WASHINGTON (MarketWatch) -- Standard & Poor's defrauded investors in residential mortgage-backed securities and collateralized debt obligations to the tune of more than $5 billion, Attorney-General Eric Holder said Tuesday in announcing a lawsuit against S&P and its parent, McGraw-Hill.

The lawsuit brought by the Justice Department was brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allows the Justice Department to seek civil penalties equal to the losses suffered by federally insured financial institutions. "We allege that, by knowingly issuing inflated credit ratings for CDOs - which misrepresented their creditworthiness and understated their risks - S&P misled investors, including many federally insured financial institutions, causing them to lose billions of dollars. In addition, we allege that S&P falsely claimed that its ratings were independent, objective, and not influenced by the company's relationship with the issuers who hired S&P to rate the securities in question - when, in reality, the ratings were affected by significant conflicts of interest, and S&P was driven by its desire to increase its profits and market share to favor the interests of issuers over investors," Holder said.

S&P alleged wrongdoing occurred between 2004 and 2007, the government said. S&P calls the suit "meritless" and said its rating reflected its best judgment at the time.