Standard & Poor’s, whose “safe” ratings on risky mortgage-backed securities helped inflate the subprime bubble, has now settled accusations that it orchestrated a similar fraud years after the bubble burst.
S&P, which is owned by McGraw Hill, has agreed to settle an array of government investigations stemming from 2011, paying nearly $80 million, federal and state authorities announced Wednesday.
As part of the deals, reached with the Securities and Exchange Commission and the attorneys general in New York and Massachusetts, S&P agreed to take a one-year “timeout” from rating certain commercial mortgage investments at the heart of the case, an embarrassing blow to the rating agency.
“Investors rely on credit rating agencies like Standard & Poor’s to play it straight when rating complex securities,” Andrew J. Ceresney, the SEC’s enforcement director, said in a statement, referring to commercial-mortgage-backed securities. “But Standard & Poor’s elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors.”
The settlement, which came on top of an action filed against a former S&P ratings executive, is the SEC’s first action against a top ratings firm. Despite the central role that rating agencies played in the crisis — awarding inflated credit ratings to mortgage investments that spurred the meltdown — they faced no SEC penalties.
Yet the Justice Department and several state attorneys general did take action, suing S&P in connection with the crisis. After fighting that case for two years, S&P has now reached a tentative settlement that would require it to pay $1.37 billion, a penalty large enough to wipe out its operating profit for a year.
On Wednesday, in addition to the commercial mortgage settlement, S&P resolved accusations of internal control “failures” in its surveillance of rating investments backed by home mortgages. The breakdowns, which echo the rating agency’s problems during the crisis, came between October 2012 and June 2014.
S&P’s settle-at-all-costs mentality signifies an abrupt shift in its strategy. It also reflects a change atop McGraw Hill’s legal department, which recently installed a new general counsel, Lucy Fato, formerly a partner at the law firm Davis Polk.
In a statement Wednesday about its settlement with the SEC and the attorneys general in New York and Massachusetts, S&P said it was “pleased to have concluded these matters.” It added that it “takes compliance with regulatory obligations very seriously and continues to make investments in people and technology to strengthen its controls and risk management throughout the organization.”
In settling, S&P agreed to pay more than $58 million to the SEC, $12 million to New York Attorney General Eric T. Schneiderman and $7 million to Martha Coakley, Massachusetts’ attorney general. S&P had previously announced that it expected to pay about $60 million to settle the investigations.