SEC Fines and Suspends S & P for Securities Fraud
The Securities and Exchange Commission (SEC) has fined Standard & Poor’s (S&P) $77 million and suspended (S&P) for one year from rating certain types of mortgage bonds as part of a settlement regarding claims that S&P issued misleading ratings for commercial mortgage-backed securities (CMBS).
This was the SEC’s first ever action against a major credit rating agency. S&P also reached a settlement with the Attorneys General in New York and Massachusetts, although these involve separate incidents regarding ratings leading up to the 2008 financial crisis. This case involves a Justice Department investigation into whether S&P issued overly optimistic ratings to sub-prime mortgage products in the time leading up to the financial crisis.
This is an unprecedented situation where a ratings agency finally is being held accountable for its role in securities fraud. We long have believed that rating agencies are not neutral. They are paid by the issuers of the very securities they have been hired to rate. There is an inherent conflict of interest with that arrangement because ratings agencies have a huge incentive not to be overly critical with their ratings so that issuers continue to pay them to rate securities. As long as this type of compensation arrangement exists, investors should remain skeptical of the credibility of bond ratings.
Per the terms of the settlement, S&P will be banned for one year from rating bonds within “conduit fusion” CMBS, the largest type of bonds in the U.S. Conduit fusion combine large amounts of fairly small commercial property loans with other, larger real estate debts.
Details of the suspension indicate that S&P had knowledge in 2011 of potentially conflicting sums in its models, but in 2012 made misleading claims that its system could handle Depression-era levels of economic stress as a way to recoup some of the business it had recently lost.
The attorneys at Dimond Kaplan & Rothstein, P.A. have extensive experience handling securities fraud and stockbroker fraud cases throughout the nation. Contact us to set up a free telephone consultation or a meeting at one of our offices.