LEGAL NEWSLINE

LOS ANGELES (Legal Newsline) -- The U.S. Department of Justice is accusing the nation's largest credit ratings agency of fraud in a suit filed in federal court late Monday.

According to the Los Angeles Times, the DOJ filed civil fraud charges against Standard & Poor's Rating Services, a subsidiary of The McGraw-Hill Companies Inc., in the U.S. District Court for the Central District of California.

The government's suit against S&P focuses on its ratings in 2007 of certain U.S. collateralized debt obligations, or CDOs, the agency said in a statement.

The DOJ contends in its suit that S&P inflated mortgage investment ratings and set them up for a crash, the Times reported.

In particular, the government claims that the agency -- from September 2004 through October 2007 -- "knowingly and with the intent to defraud, devised, participated in and executed a scheme to defraud investors" in certain mortgage-related securities.

It also claims S&P falsely represented that its ratings were "objective, independent, uninfluenced by any conflicts of interest."

The suit is the first significant federal action against the industry, the Times reported.

And according to the newspaper, a group of state prosecutors are expected to join in the suit. New York Attorney General Eric Schneiderman also is reportedly preparing his own suit.

In a statement late Monday, S&P called the DOJ suit "entirely without factual or legal merit," saying it disregards the "central facts" that it reviewed the same subprime mortgage data as the rest of the market -- including, it says, U.S. government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained -- and that every CDO that the DOJ has cited to the agency also independently received the same rating from another rating agency.

"S&P deeply regrets that our CDO ratings failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time," the agency said. "However, we did take extensive rating actions in 2007 -- ahead of other ratings agencies -- on the residential mortgage-backed securities (RMBS), which were included in these CDOs.

"As a result of these actions, more collateral or other protection was required to support AAA ratings on CDOs."

The agency added, "With 20/20 hindsight, these strong actions proved insufficient -- but they demonstrate that the DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith."

For S&P's full statement, click here.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.