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Originally published: 2013-02-07 17:15:29
Last modified: 2013-02-07 17:15:29

NC, other states sue Standard and Poor's

by Staff Reports

Credit rating agency Standard and Poor's knowingly inflated its ratings for certain risky securities, contributing to the nation's financial crisis, N.C. Atty. Gen. Roy Cooper alleged Tuesday in a lawsuit he filed along with several other states and federal authorities.

"Investors thought they were getting objective information, but they got misled and our entire economy paid a heavy price," Cooper said. "These misrepresentations played a major role in creating the national financial crisis, and they must be prevented from happening again."

Cooper filed a lawsuit in Wake County Superior Court asking the court to stop Standard and Poor's (S&P) from claiming objectivity to the public and require the company to change the way it does business.

Cooper and the other state attorneys general bringing similar actions seek to hold S&P accountable for misrepresenting its objectivity in rating securities that were backed by subprime mortgages. 

Investors and market participants relied on S&P to provide independent and objective credit ratings for these financial products. The federal and state complaints allege that S&P's analyses were in fact influenced by fees paid by its investment bank clients. As a result, the company knowingly inflated credit ratings for high-risk assets packaged and sold by Wall Street banks.

Structured finance securities backed by subprime mortgages were at the center of the financial crisis, Cooper's office stated. These financial products, including residential mortgage-backed securities (RMBS) and collateral debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages. 

Cooper alleges that S&P delayed downgrading certain risky investments in order to continue earning lucrative fees.

S&P's alleged misconduct began as early as 2001, became particularly acute between 2004 and 2007, and continued until as recently as 2011, the statement from Cooper's office said.

Along with North Carolina, states filing actions against S&P include Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Idaho, Iowa, Maine, Missouri, Pennsylvania, Tennessee, and Washington. The U.S. Department of Justice also filed suit against S&P on Monday. Connecticut, Illinois and Mississippi previously filed actions against S&P. 

In a statement Tuesday, Standard & Poor's released a statement in response to the lawsuits.

"The DOJ and some states have filed meritless civil lawsuits against S&P challenging some of our 2007 CDO ratings and the underlying RMBS models," the company said. "Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. We will vigorously defend S&P against these unwarranted claims. S&P has always been committed to serving the interests of investors and all market participants by providing independent opinions on creditworthiness based on available information.

"At all times, our ratings reflected our current best judgments about RMBS and the CDOs in question. Unfortunately, S&P, like everyone else, did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected."