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Monday, March 30, 2020

Majority of states suing S&P say they're handling case in-house

By Jessica M. Karmasek | Mar 18, 2013


WASHINGTON (Legal Newsline) -- The majority of a group of states suing Standard & Poor's Rating Services say they are not using outside counsel to pursue the case, according to an informal survey.

Legal Newsline polled those states suing the ratings agency, and only five of the 16 states and District of Columbia did not respond. The five states include Arkansas, California, North Carolina, Maine and Washington.

Of the other 10 states and the District of Columbia, all said they have not hired or were not using outside counsel to pursue the case, and were handling the matter in-house.

The 10 states are: Arizona, Colorado, Connecticut, Delaware, Idaho, Illinois, Iowa, Missouri, Pennsylvania and Tennessee.

In fact, only one state, Mississippi, has hired a private law firm to help pursue its case against Standard & Poor's.

Last month, the U.S. Department of Justice and a group of 13 states and the District of Columbia filed their suit in the U.S. District Court for the Central District of California. They are accusing the ratings agency, a subsidiary of The McGraw-Hill Companies Inc., of fraud.

The 13 states include Arizona, Arkansas, California, Colorado, Delaware, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee and Washington.

The DOJ and the states 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.

The DOJ and the states contend in their suit that Standard & Poor's inflated mortgage investment ratings and set them up for a crash.

In particular, they claim 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.

They also claim Standard & Poor's falsely represented that its ratings were "objective, independent, uninfluenced by any conflicts of interest."

Connecticut, Illinois and Mississippi have filed their own, similar lawsuits against the ratings agency.

Connecticut sued the credit ratings agency and its parent in March 2010. Its current attorney general, George Jepsen, is now reportedly leading the multistate coalition.

Illinois also filed its own suit against Standard & Poor's last year.

Mississippi Attorney General Jim Hood 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 -- the same year the attorney general filed the suit against Standard & Poor's 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.

Hood said last month he "welcomed" the federal and multi-state lawsuit filed against Standard & Poor's.

"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," the attorney general said in a statement.

"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.

"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 Standard & Poor's.

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."

The new federal and state complaints allege that despite Standard & Poor'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.

Standard and Poor's called last month's 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.

"Standard & Poor's 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 in a statement. "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

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