Indiana Attorney General Greg Zoeller has filed a state lawsuit, on behalf of Secretary of State Connie Lawson’s office, against Standard & Poor’s for allegedly putting profits and market share above its objectivity when rating structured finance securities. As the lawyer for state government, Zoeller filed the action in Marion County on behalf of the Indiana Secretary of State’s office and Securities Commissioner Chris Naylor. This lawsuit is part of a joint effort by more than a dozen states and the U.S. Department of Justice, all of which have filed complaints against S&P for alleged misconduct involving its analysis of toxic mortgage-backed securities.
“Investment banks, investors and regulators look to the nation’s credit rating agencies to independently rate the risks of financial products,” Zoeller said. “Leading up to the worst financial crisis since the Great Depression, Standard and Poor’s made promises of objectivity but misled investors into purchasing financial products – like mortgage-backed securities – that they might not otherwise have invested in. The State, through its securities enforcement statutes, is committed to taking strong legal action against those that wrongfully mislead investors."
Zoeller said S&P is paid lucrative fees for rating its clients’ securities which are packaged and sold on Wall Street. The complaint alleges that S&P adjusted its analytical models for rating residential mortgage-backed securities and other structured finance securities to achieve the ratings that its clients desired.
Indiana’s complaint does not challenge S&P’s ratings of Indiana’s state and municipal securities. The complaint alleges McGraw Hill Financial, Inc. and its subsidiary Standard & Poor’s Financial Services, LLC violated the Indiana Uniform Securities Act by misrepresenting the objectivity and independence of its rating process with respect to certain structured-finance securities. The lawsuit primarily seeks injunctive relief to force S&P to comply with Indiana securities laws and civil penalties.
“I believe S&P intentionally misled the marketplace at a time when our country needed accurate information the most,” Lawson said. “Through enforcing Indiana’s securities law, we plan to hold S&P accountable for its actions. Both retail and institutional investors deserve accurate, independent and objective ratings when investing and we cannot have companies defrauding the marketplace in the pursuit of ill-gotten gains.”
According to the lawsuit, the company intentionally misrepresented that its analysis of structured finance securities was objective, independent and not influenced by its clients’ financial interests from about 2004 to 2012. However, by 2001 the company’s “…desire to maximize revenue and market share by rating as many structured finance deals as possible led S&P to cater to the preferences of large investment banks and other repeat issuers of structured finance securities that dominated S&P’s revenue base.”
Zoeller said other states may also file lawsuits against the company for misleading investors while emphasizing its independent and objective ratings process.