Biden, 12 States And Federal Government Sue S&P For Deceiving Consumers and Investors With Devastating Economic Consequences
Lawsuit charges company with misrepresenting independence of its ratings of securities backed by toxic mortgages
Wilmington – Delaware Attorney Beau Biden announced Tuesday that his office is filing a lawsuit against Standard & Poor’s, charging the rating agency with violating state law by misrepresenting that its evaluations of mortgage-backed securities were fair and impartial when actually S&P made decisions based on its own financial interests – the desire for more fees from financial institutions that issued the mortgage-backed securities.
The lawsuits announced are the first joint federal-state law enforcement action against a credit rating agency.
“Our markets and our economy only work when everyone plays by the rules,” Biden said. “S&P broke the rules and helped push our economy into the housing crisis. Today, my office has filed a complaint to hold S&P accountable for deceiving consumers and investors when they publicly misrepresented the independence and objectivity of their credit ratings.”
Biden’s suit, which is being filed today in Delaware Superior Court, is one of several suits that 13 states, the federal government, and the District of Columbia are filing against S&P this week as part of a coordinated law enforcement action. The suits focus on ratings S&P made beginning in 2001, and while most of the ratings activity on subprime-backed mortgage securities occurred between 2004 and 2007, Delaware’s suit alleges this activity continued up until 2012. The suit includes four counts charging violations of Delaware’s Consumer Fraud act and six Counts charging violations of Delaware’s Deceptive Trade Practices Act. It seeks civil penalties, restitution, and changes to the company’s business practices.
Investors make money off of mortgage-backed securities when homeowners make their monthly mortgage payments. These securities consist of large numbers of mortgages that are bundled together, and securities backed by higher-quality loans should be rated higher than securities backed by riskier, subprime mortgages. The state and federal suits allege that, despite S&P’s repeated statements emphasizing its independence and objectivity, it allowed its analysis to be influenced by the desire to earn lucrative fees from its investment bank clients and to knowingly assign inflated credit ratings to subprime mortgage-backed securities that were packaged and sold by investment banks. Those investors then lost significant sums of money when the housing market crashed and borrowers defaulted on subprime mortgage loans.
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