Attorney General Press Release Header
February 5, 2013
Attorney General Leads Multistate Coalition
 Challenging Standard & Poor’s Ratings
Attorney General George Jepsen announced today that the U.S. Department of Justice, 16 states and the District of Columbia have filed lawsuits against Standard & Poor’s Financial Services LLC (S&P), for alleged misconduct by the credit rating agency involving structured finance securities, which were at the heart of the nation’s financial crisis.
Attorney General Jepsen joined U.S. Attorney General Eric Holder at the Department of Justice for the announcement, with attorneys general from several of the participating states. Connecticut was the first state to sue S&P and its parent, The McGraw-Hill Companies, Inc., on these allegations in March, 2010, and is leading the multistate coalition.
The federal and state complaints allege that despite S&P’s repeated statements emphasizing its independence and objectivity, the credit rating agency allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients, and knowingly assigned inflated credit ratings to toxic assets packaged and sold by the Wall Street investment banks.  This alleged misconduct began as early as 2001, became particularly acute between 2004 and 2007, and continued as recently as 2011.
Structured finance securities backed by subprime mortgages were at the center of the 2008 financial crisis.  These financial products, including residential mortgage-backed securities (RMBS) and collateral debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages.
“We believe that S&P’s analytical models for rating structured finance securities were directly influenced by the demands of S&P’s powerful investment banking clients. Contrary to what S&P was publicly representing, S&P served its own financial interests and those of the investment banks. Countless investors and market participants, including state regulators, were misled by S&P’s promise that its analysis was independent and objective.  S&P violated the trust that it purposefully cultivated with the marketplace leading to disastrous results,” Attorney General Jepsen said.
The state lawsuits seek court orders to stop S&P from making misrepresentations to the public; changes in the way the company does business; civil penalties and disgorgement of ill-gotten profits, which may total hundreds of millions of dollars.
Connecticut’s lawsuit, brought under the Connecticut Unfair Trade Practices Act, is pending in Hartford Superior Court.  The States of Mississippi and Illinois filed lawsuits against S&P in 2011 and 2012, respectively, based on Connecticut’s theory of the case.
Filing lawsuits today are:  Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee, and Washington.
Connecticut also assisted the initial stages of the Department of Justice’s investigation because of its earlier investigation of S&P. “Today’s announcement is the result of unprecedented cooperation between state attorneys general and the Department of Justice.  Combining the resources and authority of our state and federal offices increases the likelihood of success in complex financial cases, and winning real protections for consumers,” Jepsen said.
The complaints allege that investors and other market participants, such as state regulators, relied on S&P’s promises of independence and objectivity.  Instead, S&P acted to benefit its own financial interests by adjusting its analytical models for rating residential mortgage-backed securities and collateral debt obligations to ensure it assigned as many AAA ratings as possible.  Assessing actual credit risk was of secondary importance to revenue goals and winning new business, the complaints allege.
Further, the complaints allege that S&P’s profit motive affected its monitoring, or surveillance, on previously rated RMBS and CDOs. In order to continue earning lucrative fees, the complaints allege, S&P delayed taking rating actions on impaired RMBS and continued rating new CDOs even after it determined that the security’s underlying collateral was impaired.
The congressionally appointed bipartisan Financial Crisis Inquiry Commission concluded in its final report that the financial crisis “could not have happened” without ratings agencies such as S&P.
S&P and its chief competitor, Moody’s Investors Service, Inc. (Moody’s), dominate the market for rating structured finance securities and are responsible for rating virtually all structured finance securities issued into the global capital markets. Connecticut has brought a similar lawsuit against Moody’s, which is pending in state court.
Staff from the OAG’s Finance and Antitrust and Government Program Fraud departments are working with the Attorney General on this case, including Assistant Attorneys General Matthew Budzik, Finance department head; Michael Cole, Antitrust and Government Program Fraud department head; George O’Connell and Lorrie Adeyemi; Legal Fellow Ryan Ponte, and Paralegal Holly MacDonald. Former Assistant Attorney General Laura Martella also assisted.

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