Attorney General Jim Hood announced today that Mississippi, the U.S. Department of Justice and a coalition of 19 states and the District of Columbia have reached a settlement agreement with Standard & Poor’s Financial Services LLC (S&P) resolving allegations that S&P misled investors when it rated structured finance securities in the lead-up to the 2008 financial crisis.
Mississippi opened its investigation into S&P in 2010, filing its lawsuit against the company in 2011. Mississippi partnered with Connecticut, the first State to sue S&P in 2010. Illinois followed in 2012. In 2013, DOJ and the other 17 states filed similar lawsuits against S&P.
The settlement requires S&P to pay $1.375 billion. The 20 States will share $687.5 million and DOJ will receive $687.5 million. Mississippi will receive $33 million for its role as a Lead State in the 20-state coalition. The settlement amount is expected to wipe out S&P’s operating profit for a year.
“This settlement is the culmination of years of hard-fought litigation against an industry giant,” said Attorney General Hood. “The result is historic because it finally and indisputably holds S&P accountable for its role in the financial crisis. The size of the settlement and the successful partnership between the States and the Department of Justice send a strong message that no company is above the law.”
In addition to the financial settlement, S&P has agreed to a statement of facts acknowledging conduct related to its analysis of structured finance securities. S&P also agrees in the settlement to comply with all applicable state laws and, for five years, will cooperate with any request for information from any state expressing concern over a possible violation of state law. Further, the states retain authority to enforce their laws – the same laws used to bring these cases – if S&P engages in similar conduct in the future. The states and federal government have agreed to file stipulated judgments, consent judgments or similar pleadings in their lawsuits in order to implement the terms of the settlement agreement and resolve their respective court proceedings.
“The credit rating agencies were just as culpable as the investment banks in causing the financial crisis,” said Attorney General Hood. “In some ways, the conduct by the credit rating agencies was worse because these agencies held themselves out to be objective and independent.”
The federal and state lawsuits alleged that, despite S&P’s repeated statements emphasizing its independence and objectivity, the credit rating agency allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients – while investors and other market participants, including state regulators, relied on S&P’s promises of independence and objectivity. The complaints alleged that the agency knowingly assigned inflated credit ratings to toxic assets packaged and sold by the Wall Street investment banks. The alleged misconduct began as early as 2001 and became particularly acute between 2004 and 2007.
Structured finance securities backed by subprime mortgages were at the center of the financial crisis. These financial products, including residential mortgage backed securities (RMBS), commercial mortgage backed securities (CMBS), and collateralized debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages.
In August 2014, the United States Securities and Exchange Commission adopted new requirements for credit rating agencies that address conflicts of interest and procedures to protect the integrity and transparency of rating methodologies and that provide for certifications to accompany credit ratings attesting that the ratings were not influenced by other business activities.
“I am satisfied that S&P now understands the gravity of its conduct,” said Attorney General Hood. “The result we achieved could not have happened without the cooperation of the states and partnership with the Department of Justice. I thank Attorney General Holder and each of the Attorneys General from the settling states for their efforts in this case.” In addition to Mississippi, the states involved in today’s settlement include Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington as well as the District of Columbia.
Attorney General Hood especially thanks Connecticut Attorney General George Jepsen for his Office’s exceptional leadership and partnership throughout this case. Notes Attorney General Hood, “General Jepsen and the superb lawyers from his Office deserve immense praise.”
Mississippi and Connecticut both have pending lawsuits for similar alleged misconduct against Moody’s Investors Service. Those cases have been temporarily stayed pending resolution of the S&P case.
Click here to view the S&P Settlement Agreement, which includes the Statement of Facts as Annex 1 (beginning on p. 53 of the PDF).
Magnolia Tribune
