LOS ANGELES -- The U.S. Department of Justice filed suit last night against Standard & Poor's, alleging the firm ignored its own standards to give high ratings to mortgage bonds sold to WesCorp FCU and other investors that created billions of dollars of losses.
The suit, filed in U.S. District Court for the Central District of California, near the failed corporate credit union’s San Dimas, Calif., offices, alleges that S&P from September 2004 through October 2007 "knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors in" CDOs and securities backed by residential mortgages.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, known as the S&L Bailout law, the U.S. seeks civil penalties of as much as $1.1 million for each violation.
The allegations stem from S&P's rating of collateralized debt obligations, or CDOs, issued in 2007 that included bundles of subprime mortgages. The government is targeting about 30 of those deals, which plummeted in value soon after being sold to investors. WesCorp was a major purchaser of CDOs, most of which went bad at great cost to the one-time $34 billion corporate.
Losses on its mortgage-backed securities, including CDOs, prompted NCUA to take over WesCorp in March 2009. WesCorp lost almost all of its $609 million investment in CDOs, making up the brunt of its $1.2 billion of losses in 2009. Projected losses on the corporate failure are as much as $7 billion.
The suit claims that S&P "falsely represented that its credit ratings of RMBS and CDO tranches were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P's analytical judgment, and represented S&P's true current opinion regarding the credit risks" of the securities. "S&P's desire for increased revenue and market share in the RMBS and CDO ratings markets led S&P to downplay and disregard the true extent of the credit risks," the U.S. said.
S&P, a unit of New York-based McGraw-Hill, denied wrongdoing last night and said that any lawsuit would be without merit.
