LOS ANGELES (Legal Newsline) -- The U.S. Department of Justice, in a filing Monday, asked a federal court not to dismiss its lawsuit against The McGraw-Hill Companies Inc. and its subsidiary Standard & Poor's Rating Services.
The DOJ filed its 25-page opposition in response to the credit ratings agency's motion to dismiss, which was filed in the U.S. District Court for the Central District of California last month.
"It would no doubt come as some surprise to many -- RMBS (residential mortgage-backed securities) and CDO (collateralized debt obligations) investors, regulators and legislators among them -- that S&P's repeated assurances that its ratings were objective, independent and uninfluenced by any conflict of interest were 'mere puffery,' entitled to no more weight than an infomercial hawker's claim that his knife will outlast any other," the government wrote. "This, however, is what S&P now asserts in an effort to disavow its prior assurances that is unsupported by fact or law.
"As the complaint alleges, S&P marketed its analytical objectivity and independence and trumpeted the specific measures it had put in place to assure that it would remain unaffected by the 'issuer pays' system under which S&P was retained by those whose securities it was rating. S&P touted these measures not only to investors in those securities, but also to the SEC to satisfy requirements for maintaining its status as a Nationally Recognized Statistical Rating Organization (a status S&P had to have for its ratings to be relied on by many institutional investors) and to Congress in addressing legislation that might have imposed stricter regulation of NRSROs."
The DOJ continued, "S&P's claim that, as a matter of law, its assurances could not be material to investors in RMBS and CDOs improperly ignores both the nature of S&P's assurances and the context in which they were made."
Read the DOJ's full opposition here.
In its April 22 motion to dismiss, Standard & Poor's asked the federal court to dismiss the lawsuit against it. The credit ratings agency's lead attorney, John Keker of San Francisco-based Keker & Van Nest, argues that the DOJ's complaint fails to state a claim.
Keker also 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.
"From start to finish, the complaint overreaches in targeting S&P, a rating agency that did not create, issue, sell or receive any interest in any security at issue in the case," Keker wrote in the 21-page motion.
"It claims fraud despite the fact that S&P acted in accordance with its well-established public practice of relying upon its own ratings, in which it believed, despite the fact that other rating agencies issued ratings identical to those of S&P on the same securities at issue, and despite the fact that its views were consistent with those of virtually every other market participant, including the financial institutions whose losses are cited in the complaint, as well as officials at the highest level of the United States government.
He continued, "If the government's case appears to be a stretch, that is because it is. S&P's inability, together with the Federal Reserve, Treasury and other market participants, to predict the extent of the most catastrophic meltdown since the Great Depression reveals a lack of prescience but not fraud."
In February, the DOJ and a group of 13 states and the District of Columbia sued the credit ratings agency in federal court. They are accusing S&P 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 agency's misconduct involved structured finance securities backed by subprime mortgages that were at the heart of the nation's financial crisis.
In their suit, the government and the states contend 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.
Illinois 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.
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.