The Justice Department, along with state prosecutors, plan to to file civil charges against Standard & Poor’s Ratings Service, accusing the firm of fraudulently rating of mortgage bonds that led to the financial crisis, people briefed on the plan said.
Up until last last week, the Justice Department had been in settlement talks with S&P, these people said. But the negotiations broke down after the Justice Department said it would seek a settlement in excess of “10 figures,†or at least $1 billion, these people said, which wipe out the profits of S&P’s parent company, McGraw-Hill Company, for an entire year.
McGraw Hill earned $911 million last year.A civil suit against S.&P. would be the first case the government has brought against the credit ratings agencies related to the financial crisis, despite continued questions about the agencies conflicts of interest and role in creating a housing bubble.
By bringing a civil suit, as opposed to a criminal case, the Justice Department’s burden of proof will be less, perhaps lowering the bar for a successful prosecution.
In a statement on Monday, S.&P. said that it has received notice from the Justice Department over a pending lawsuit.
The ratings agency argued any such legal action would be baseless, since it downgraded plenty of mortgage-backed investments, including in the two years leading up to the financial crisis. It also contended that other observers of the debt markets, including government officials, believed at the time that any problems without the housing sector could be contained.
“A D.O.J. lawsuit would be entirely without factual or legal merit,†the age! ncy said in its statement. “With 20/20 hindsight, these strong actions proved insufficient - but they demonstrate that the D.O.J. would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.â€
Shares in McGraw-Hill were down 3.8 percent in midafternoon trading on Monday, at $56.07.
