Updated Saturday, July 26, 2014 as of 1:15 PM ET
Practice - Regulatory/Compliance
S&P Says U.S. Fraud Lawsuit Over Ratings Is Too Broad for Trial
Tuesday, December 3, 2013

McGraw Hill Financial’s Standard & Poor’s unit said the U.S. government has broadened the securities covered in its fraud lawsuit against the ratings company so that the case would be unmanageable at trial.

The Justice Department has selected 56 residential mortgage-backed securities and 107 collateralized-debt obligations rated by S&P that will form the basis for its claims at trial that S&P defrauded investors, according to a joint filing yesterday in federal court in Santa Ana, California.

“Instead of narrowing its case, the government now proposes that discovery and trial in this action will concern more than five times as many securities as it identified in the complaint,” S&P said in the filing.

U.S. District Judge David Carter in Santa Ana, California, has set a Dec. 16 scheduling conference to help determine how big a case the government can bring before a jury and how long both sides will have to get ready for trial.

The Justice Department said this year’s trial against Bank of America Corp.’s Countrywide unit in New York, which involved similar Financial Institutions Reform, Recovery, and Enforcement Act allegations regarding more than 11,000 loans, showed that a trial on S&P’s liability based on the securities it proposed wasn’t unmanageable.

S&P said pre-trial information exchange for the more than 150 securities would take at least two years. The judge should limit the case to securities bought by Citigroup Inc., which bought more of the securities and suffered more of the alleged losses than any other entity, according to S&P.


The government alleged in its Feb. 4 complaint against S&P that the firm knowingly downplayed the risk on securities before the credit crisis in a desire to win business from investment banks that sought the highest possible ratings to sell them. The company has denied the allegations and said it has been singled out because it was only credit rater that downgraded U.S. debt.

The Justice Department said in yesterday’s filing that S&P’s contention that the government has expanded the case is “flawed” because it’s neither improper nor unusual for the allegations to involve more securities than the 26 CDOs it referred to by name in the complaint.

The case is U.S. v. McGraw-Hill Cos., 13-cv-00779 U.S. District Court, Central District of California (Santa Ana).

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