S&P to pay $77 million to settle U.S. civil charges over ratings
WASHINGTON/NEW YORK (Reuters) - Credit-rating agency Standard & Poor's will pay $77 million in an unprecedented settlement with U.S. and state regulators who accused S&P of misleading investors about its rating system in 2011 and 2012.
The case marks the first time the U.S. Securities and Exchange Commission has levied civil charges against one of the Big Three credit-raters since it won authority from Congress in 2006 to police the sector. An SEC official said he expected more enforcement activity in the future.
S&P, which neither admitted nor denied wrongdoing in the settlement, also agreed to be barred for one year from rating certain commercial-backed mortgage securities.
"The settlements do not affect any outstanding S&P Ratings credit ratings or the manner in which S&P Ratings conducts credit analysis under the relevant criteria," the company said in a statement, adding that it takes regulatory compliance seriously.
An even bigger potential settlement is on the horizon for S&P, a unit of McGraw Hill Financial Inc. S&P is close to an agreement to pay $1.375 billion to settle government lawsuits over mortgage ratings issued in the run-up to the 2008 financial crisis, a person familiar with the matter said.
Another source said S&P was in talks to pay as much as $1.5 billion to settle the lawsuits.
The U.S. Justice Department sued the firm in February 2013, claiming more than $5 billion in losses from S&P-rated securities during the 2007-2009 financial crisis.
BLACK EYE
In Wednesday's settlement, the SEC said S&P agreed to pay $58 million to settle three matters with the agency plus $19 million to settle parallel cases with the attorneys general of New York and Massachusetts.
Unlike the Justice Department case, the charges brought by the SEC involve post-crisis actions starting in 2011.
New York Attorney General Eric Schneiderman said in a statement that S&P's 2011 conduct amounted to "lying to investors" so it could bolster profit.
The investigation found that S&P misled investors by secretly using more aggressive assumptions in its calculations than it publicly disclosed. The less conservative assumptions made them more attractive to issuers, officials said.
"These cases are a reminder that race-to-the-bottom behavior - that is, loosening of ratings standards in pursuit of market share - persists even though the crisis has ended," Andrew Ceresney, the SEC's enforcement director, told reporters on a conference call.
Most of the allegations against S&P center around problems that arose in 2011 over its ratings of certain commercial mortgage-backed securities (CMBS).
The company suffered a blow to its CMBS business that year, after a major error forced it to withdraw a rating on a $1.5 billion deal.
The SEC and state attorneys general said the company publicly misrepresented the methodology it was using to rate six different CMBS products in 2011.
In an effort to regain the market share it lost over its errors, the company "published a false and misleading article" claiming its new credit levels could withstand "Great Depression-era" stress levels, the SEC said.
The one-year ban agreed to by S&P applies to what are known as conduit fusion CMBS transactions. The SEC determined that S&P was not equipped to participate in rating those securities because of inadequate internal controls.
The one-year suspension is a "black eye" for S&P but will likely have minimal financial impact because it applies to a niche segment, analysts at Piper Jaffray said in a note.
S&P and its main U.S. rivals, Moody's Investors Service and Fitch Ratings, account for about 96 percent of all credit ratings, according to a 2012 SEC report.
Asked on a call with reporters whether the SEC was investigating other credit rating agencies for similar violations, Ceresney said the commission is very focused on the issue.
"This is an area in which I imagine there will be future activity," he said, declining to comment on particular cases.
In addition to charging the company on Wednesday, the SEC brought related civil charges against former S&P executive Barbara Duka.
Duka is planning to contest the charges in an SEC administrative court. Her attorney, Guy Petrillo, said in a statement that his client "did not act wrongfully" and performed her duties with the "utmost good faith."
(Additional reporting by Nate Raymond and David Ingram in New York; editing by Susan Heavey, Noeleen Walder and Matthew Lewis)