Madigan
CHICAGO (Legal Newsline) - Illinois Attorney General Lisa Madigan is putting some blame for the housing market crash on the credit rating agency Standard & Poor's.
Madigan filed a lawsuit Wednesday in Cook County Circuit Court, alleging the agency gave out high ratings to unworthy investments as a strategy to increase its revenue and market share. Former Ohio Attorney General Richard Cordray made similar claims against S&P and the two other major credit rating agencies in a lawsuit he filed while in office.
Following a recent recess appointment by President Barack Obama, Cordray is now the head of the Consumer Protection Financial Bureau.
A federal judge tossed his case against the three. Current Ohio Attorney General Mike DeWine has appealed.
"Publicly, S&P took every opportunity to proclaim their analyses and ratings as independent, object and free from its desire for revenue," Madigan said. "Yet privately, S&P abandoned its principles and instead used every trick possible to give deals high ratings in order to retain clients and generate revenue.
"The mortgage-backed securities that helped our market soar - and ultimately crash - could not have been purchased by most investors without S&P's seal of approval."
Madigan says she has internal e-mails from S&P employees that showed the company misrepresented its ratings as objective. She says one instant message during a conversation during ratings compared to the reality of risk involved has an employee saying an investment "could be structured by cows and we would rate it."
Investors relied on the agency's rating because of its reputation for independence and objectivity, Madigan says, though testimony by a former managing director before Congress said "profits were running the show."
Cordray's lawsuit, filed in November 2009, claimed the five public pension funds lost at least $457 million as a result of the agencies' actions. He blamed them for helping cause the collapse of the housing and credit markets.
"The rating agencies rightly argue that they were not the sellers of the securities purchased by the Ohio funds," U.S. District Judge James Graham wrote in his September decision. "This leaves the Ohio funds to argue that the rating agencies are liable because they 'receive(d) the profits accruing from such sale.'
"The Ohio funds contend that the rating agencies received profits because 'the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided.' Elsewhere, the complaint alleges that the rating agencies were not paid unless the 'target rating was attained' and 'the credit rating was issued.'"
In his lawsuit, Cordray said the rating firms marketed mortgage-backed securities by giving them the highest ratings and lowest risk. He said the agencies put high ratings on toxic mortgage debt in return for high fees paid by those they were rating.
He alleged the agencies violated the Ohio Securities Act and committed negligent misrepresentation. The five Ohio funds made 308 separate investments in mortgage-backed securities from 2005-08.
"The Ohio funds' argument has no merit because the language of the statute plainly requires that the profits accrue from the sale of securities, not from work performed in preparation for a securities offering, if the fee is not contingent upon an actual sale," Graham wrote.
Madigan has been aggressive against mortgage lenders. She was part of a $335 million settlement announced in December with Countrywide, which was alleged to have discriminated against customers. She has filed a similar lawsuit against Wells Fargo.
In another case against Countrywide, she was one of many who accused the company of predatory lending. The result was a nationwide $8.7 billion settlement.
From Legal Newsline: Reach John O'Brien by e-mail at jobrienwv@gmail.com.