JACKSON, Miss. (Legal Newsline) -- Mississippi Attorney General Jim Hood, who is being represented by campaign contributors in his, says he "welcomes" the federal and multi-state lawsuits filed against Standard & Poor's Rating Services for fraud last week.
"I am pleased that the U.S. Department of Justice and attorneys general from across the nation are joining us in our efforts to hold the credit rating agencies accountable by initiating lawsuits like the one we filed almost two years ago," Hood said in a statement last week.
The attorney general has had his own consumer protection lawsuit pending against Standard & Poor's, as well as its chief competitor, Moody's Investors Service Inc., since 2011.
He filed his lawsuit against the ratings agencies in Hinds County Chancery Court in May 2011. The agencies had it moved to the U.S. District Court for the Southern District of Mississippi Jackson Division a month later.
According to documents filed in the federal court, Hood hired Jackson-area attorneys Blake A. Tyler and Vaterria Martin to help with his office's case against the credit ratings agencies.
More notably, he hired Betsy A. Miller and Kit Pierson of Washington, D.C.-based Cohen Milstein Sellers & Toll PLLC.
Miller, Pierson and Cohen Milstein all made donations to Hood's re-election campaign in 2011, according to FollowTheMoney.org -- the same year the attorney general filed the suit against S&P and Moody's.
According to the National Institute on Money in State Politics database, Miller donated twice to Hood's campaign -- once for $500 and again for $667. Pierson gave $667. Their law firm made a separate $1,000 donation. Various attorneys at the law firm also made donations, totaling more than $6,500.
Mississippi's lawsuit alleges that during the housing boom S&P and Moody's each earned fees in excess of $1 billion annually for rating these securities.
Like Hood, the U.S. Department of Justice and a group of 13 states and the District of Columbia are seeking accountability for alleged misconduct by S&P.
The 13 states include Arizona, Arkansas, California, Colorado, Delaware, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee and Washington.
The DOJ and multistate coalition -- also like Hood -- allege that the credit ratings agency's misconduct involved structured finance securities backed by subprime mortgages that were at the heart of the nation's financial crisis.
But Mississippi wasn't the first state to sue S&P.
Connecticut sued the credit ratings agency and its parent, The McGraw-Hill Companies Inc., in March 2010. Its current attorney general, George Jepsen, is now leading the multistate coalition.
Illinois also filed its own suit against S&P in 2012.
Like Mississippi's lawsuit, the new federal and state complaints allege that despite S&P's repeated statements emphasizing its independence and objectivity, the credit ratings agency allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients, who paid three times more for ratings of mortgage-backed securities than for ratings of traditional bonds and knowingly assigned inflated credit ratings to toxic assets packaged and sold by the Wall Street investment banks.
This alleged misconduct began as early as 2001, and became particularly acute between 2004 and 2007. The federal and state complaints contend there is new evidence that it continued as recently as 2011.
Structured finance securities backed by subprime mortgages were at the center of the financial crisis. These financial products, including residential mortgage-backed securities, or RMBS, and collateral debt obligations, or CDOs, derive their value from the monthly payments consumers make on their mortgages.
"The credit rating agencies, including Standard & Poor's and Moody's, are just as culpable as the investment banks in causing the financial crisis. In some ways, the conduct by the credit rating agencies was worse because these agencies held themselves out to be objective and independent," Hood said last week.
"As Mississippi has alleged in its lawsuit, and as is echoed now by the U.S. Department of Justice and multiple sister states in similar complaints, these representations were false."
As the congressionally-appointed, bipartisan Financial Crisis Inquiry Commission concluded in its final report in January 2011, the financial crisis "could not have happened" without credit ratings agencies such as S&P.
During the housing boom, the demand for ratings of mortgage-backed securities increased exponentially.
"The rating agencies should be disgorged of the hundreds of millions in profits they made from banks," Hood said.
"As described in our complaint, these banks were submitting the faulty mortgage backed securities in exchange for the agencies' seal of approval."
And although they are civil cases, Hood contends somebody should go to jail.
"The rating agencies' actions almost bankrupted our country," the attorney general said.
Like Mississippi's pending case, the actions filed last week seek court orders to stop S&P from making misrepresentations to the public; changes in the way the company does business; and civil penalties and disgorgement of ill-gotten profits, which may total hundreds of millions of dollars.
Meanwhile, S&P has hired John Keker, one of America's leading trial lawyers, to defend it, along with New York law firm Cahill Gordon & Reindel and its partner Floyd Abrams, the San Francisco Chronicle reported Friday.
Keker, a founding partner of San Francisco-based Keker & Van Nest, was the attorney for prominent Mississippi attorney Richard "Dickie" Scruggs during two judicial bribery cases. Scruggs pleaded guilty to both and received 7 1/2 years in prison.
Federal prosecutors charged Scruggs with offering $50,000 to Lafayette County Circuit Judge Henry Lackey in exchange for a ruling compelling arbitration in a dispute over attorneys fees earned in Hurricane Katrina cases.
They also charged Scruggs, whose brother-in-law is former U.S. Sen. Trent Lott, with offering consideration for a federal judgeship to former Hinds County Circuit Court Judge Bobby DeLaughter. DeLaughter allegedly took the deal and entered a favorable ruling in a dispute over fees between Scruggs and his former business partners in asbestos litigation.
In a statement last week, S&P called the DOJ suit, in particular, "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 credit ratings 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."
From Legal Newsline: Reach Jessica Karmasek by email at firstname.lastname@example.org.