S&P Settles Charges with SEC Regarding Fraudulent Misconduct in CMBS Ratings (with Gambro Comment)

The SEC announced that it reached a settlement with Standard Poor's Rating Services ("S&P") to resolve the SEC's investigation into a series of federal securities law violations involving fraudulent misconduct in its ratings of certain commercial mortgage-backed securities ("CMBS").

S&P also agreed to settle parallel cases announced by the New York Attorney General's office and the Massachusetts Attorney General's office.

The SEC issued three orders instituting settled administrative proceedings against S&P that addressed the following violations:

• the methodology of S&P's practices in six U.S. conduit/fusion CMBS ratings, during which S&P misrepresented that it was using one approach when it actually used a different methodology;
• the publishing of a false and misleading article that purported to show new credit enhancement levels that could withstand "Great Depression-era" levels of economic stress, in an attempt to reenter the market in 2012 after being frozen out of it for rating conduit fusion CMBS in late 2011; and
• internal control failures in S&P's surveillance of residential mortgage-backed securities ratings.

In a separate order, the SEC Enforcement Division also alleged that the former head of S&P's CMBS Group fraudulently misrepresented the manner in which the firm calculated a "critical aspect" of certain CMBS ratings in 2011.

Gambro Comment: As part of the settlement, S&P agreed not to rate any new U.S. conduit/fusion deals for a year. S&P's undertaking does not extend to single borrower deals, where S&P has a much greater presence than in conduit deals.

See: SEC Order Re: S&P Ratings Methodology; SEC Order Re: S&P False/Misleading Publication; SEC Order Re: S&P RMBS Surveillance; SEC Order against Former Head of S&P; SEC Form 8-K Report on S&P Case; SEC Press Release.