LOS ANGELES Standard & Poor's on Tuesday urged a federal court here to dismiss a suit brought by the Justice Department over investments it rated for WesCorp FCU, Eastern Financial Florida CU and other investors, saying the $5-billion suit is “retaliation” for its 2011 decision to strip the country of its AAA credit rating.
S&P said in its response to the U.S. suit it was the only major credit rating agency to take away the United States' top rating and the only rating agency sued by the Department of Justice for allegedly misleading credit unions and banks about the credibility of its ratings before the 2008 financial crisis.
The suit focuses on numerous securities rated by S&P that eventually soured, including investments in collateralized debt obligations, or CDOs, that sunk WesCorp and Eastern Financial Florida CU, two of the biggest ever credit union failures.
In a filing with the U.S. District Court for the Central District of California, S&P said the lawsuit attempts to punish it for exercising its First Amendment free speech rights under the U.S. Constitution and also seeks "excessive fines" in violation of the Eighth Amendment.
It said the government's "impermissibly selective, punitive and meritless" lawsuit was brought "in retaliation for defendants' exercise of their free speech rights with respect to the creditworthiness of the United States of America."
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 credit union failure are as much as $7 billion.
Eastern Financial was taken over by NCUA after it lost 99% of its $150 million investment in CDOs, making it the biggest ever natural person credit union failure. Space Coast CU, which acquired the remnants of the failure, is suing several Wall Street banks over the sale of the CDOs. The Space Coast CU suits cite some of the same deals included in the Justice Department suit.
CDOs are mortgage-backed securities constructed of other mortgage-backed securities.
WesCorp and Eastern Financial were the only two credit unions authorized by regulators to purchase CDOs.
