S&P to face civil charges


For a while, it seemed as though the bond rating companies would escape any sort of official sanction for their role in the credit crisis.

This seemed to some like a travesty of justice, as these for-profit firms famously doled out AAA rating for shoddy securitized products like candy on Valentine's day. As it turns out, the Justice Department and state regulators have plans to exact a measure of punishment, accusing Standard & Poor's of fraud for its ratings.

While some think that civil charges are not enough, it is somewhat surprising that even civil charges have been brought. S&P issued a prompt denial, saying such a suit "would be entirely without factual or legal merit" and that the department "would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith. The focus of the civil action is apparently about 30 CDOs issued in the first half of 2007," notes the Financial Times.

It's unclear what kind of evidence the department has amassed. Most likely, it has gathered some very interesting emails, perhaps some that indicate an unholy relationship between issuers and CDO managers on one hand and actual bond raters on the other. Email evidence has not always proven to be solid in trials, and the department might have some witnesses, which might make for powerful testimony. The legal burdens to gain a civil conviction are much lower than for a criminal conviction.

It will be interesting to say the least, though a settlement is still likely. This suit portends action against other bond rating companies, as they were all rating CDOs similarly. It may be that the evidence against S&P is the strongest.

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