Standard & Poor’s (S&P) Ratings Services will pay more than $77 million to settle charges of “fraudulent misconduct” in rating mortgage bonds with US federal and state regulators.
The credit-rating agency will also be barred from rating certain commercial mortgage-backed securities (CMBS) for one year.
“S&P elevated its own financial interests above investors by loosening its rating criteria to obtain business.” —Andrew Ceresney, SEC“Investors rely on credit rating agencies like Standard & Poor’s to play it straight when rating complex securities like CMBS,” Andrew Ceresney, director of the Securities and Exchange Commission (SEC) enforcement division, said. “But S&P elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors.”
The settlement is the first disciplinary action the SEC has charged against one of the big three ratings firms since the financial crisis.
According to the SEC and the attorneys general of New York and Massachusetts, S&P allegedly misrepresented the methodology used to rate six CMBS transactions in 2011.
In addition, the regulators said the company published a “false and misleading article” the following year that stated the new credit levels could “withstand Great Depression-era levels of economic stress.”
“S&P’s research relied on flawed and inappropriate assumptions and was based on data that was decades removed from the severe losses of the Great Depression,” the SEC said.
The regulators also said S&P failed to conduct proper surveillance of residential mortgage-backed securities from October 2012 to June 2014.
New York Attorney General Eric Schneiderman added that S&P broke the promise “not to contribute to another bubble by inflating the ratings or products they were paid to evaluate” by “lying to investors” to boost its profits.
The rating agency neither admitted nor denied the charges and said the settlement will 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 Wall Street Journalreported S&P is also expected to pay nearly $1.4 billion in fines to settle additional federal and state investigations of fraud charges before and after the financial crisis.
The SEC also announced that Norm Champ, director of the division of investment management, will leave his post later this month after a five-year tenure.
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