S&P Reaches Settlement with DOJ (with Lofchie Comment)

The Department of Justice ("DOJ") and 19 states along with the District of Columbia announced a settlement agreement with Standard Poor's Financial Services LLC ("S&P") to resolve allegations of a scheme to defraud investors. The scheme involved residential mortgage-backed securities ("RMBS") and collateralized debt obligations ("CDOs").

According to the DOJ press release, S&P issued inflated ratings, which the firm falsely misrepresented as objective, that downplayed RMBS' and CDOs' true credit risks. Additionally, the DOJ found that the company's leadership ignored its senior analysts, who warned that the company had given top ratings to financial products that were failing to perform as advertised.

Under the settlement, S&P agreed to pay a fine of $1.375 billion, which will be divided between the federal government and the other state partners.

Lofchie Comment: According to the Government's press release, S&P was required to make the following concession (among others): "S&P also agreed to retract its unsubstantiated claim that this lawsuit was initiated in retaliation for the decisions S&P made about the credit rating of the U.S. government." Whether S&P's retracted claim was substantiated or not, the existence of the claim is not relevant to whether S&P is guilty. Therefore, it seems curious for the government to require the retraction as a condition of settlement.

See: DOJ Press Release; Attorney General Holder's Statement; Complaint against S&P and McGraw Hill.Related news: S&P Settles Charges with SEC Regarding Fraudulent Misconduct in CMBS Ratings (with Gambro Comment) (January 21, 2015).