Will the DoJ Get Its Day in Court With S&P?

GavelOn Monday, the U.S. Justice Department petitioned a federal judge to allow its case against Standard & Poor’s – owned by McGraw Hill Financial (NYSE:MHFI) — to move forward, despite a motion to dismiss the case.

The Justice Department has created a $5 billion suit against S&P, accusing the agency of misrepresenting the objectiveness of its ratings on financial products. S&P allegedly drummed up business by assigning ratings to products like mortgage-backed securities that did not truthfully represent the risk involved in the investment. The standing Justice Department argument is that S&P intentionally misled investors, resulting in tremendous losses and undermining the stability of markets around the world.

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At issue is whether or not it was reasonable for investors to trust the ratings that S&P gave the instruments. Previously, a separate judge ruled that S&P’s statements about the objectivity of its ratings were “mere puffery.” This implies that the way in which S&P characterized its ratings was purely a commercial tactic, and should have been taken by investors with the same grain of salt applied to any sales pitch for any product.

Citing this ruling, S&P claims that the DoJ lawsuit has no grounds. However, the DoJ argues that S&P issued “specific, fraudulent assertions made to induce reliance on S&P’s ratings,” effectively creating and fostering an environment in which it was presumed that S&P was telling the truth, and was a credible and objective agency.

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“It would no doubt come as some surprise to many […] that S&P’s repeated assurances that its ratings were objective, independent, and uninfluenced by any conflict of interest were ‘mere puffery,’ entitled to no more weight than an infomercial hawker’s claim that his knife will outlast any other,” lawyers for the Justice Department said in the filing Monday. “This, however, is what S&P now asserts in an effort to disavow its prior assurances that is unsupported by fact or law.”

For its part, S&P has denounced the lawsuit, claiming that the DoJ cherry-picked emails to misconstrue what its analysts did. S&P claims that the DoJ is basing its case on vague and misleading language.

The case is USA vs McGraw-Hill Companies, Case No. 2:13-00779, U.S. District Court, Central District of California.

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