McGraw-Hill and S&P Sued For Securitization Credit Ratings Fraud

In federal court yesterday the U.S. Justice Department (DOJ) filed a complaint accusing McGraw-Hill and S&P of mail fraud, wire fraud and financial institutions fraud.  According to the complaint, S&P falsely represented to investors that its credit ratings were objective, independent and uninfluenced by any conflicts of interests.  Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the DOJ seeks civil penalties of as much as $1.1 million for each violation.

S&P issued credit ratings on more than $2.8 trillion worth of residential mortgage-backed securities and about $1.2 trillion worth of collateralized-debt obligations from September 2004 through October 2007, according to the complaint. S&P downplayed the risks on portions of the securities to gain more business from the investment banks that issued them, the U.S. said.

Most “Credit Rating” firms have faced criticism from U.S. lawmakers over how they granted top grades to securities that packaged home loans from the riskiest borrowers, leading to the Mortgage Crisis of 2007, that sent the economy into its longest recession since 1933 as defaults soared and U.S. home values plummeted.

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