The Justice Department, along with state prosecutors, plans to file civil charges against Standard & Poor’s Ratings Service, accusing the firm of fraudulently rating mortgage bonds that led to the financial crisis, people briefed on the plan said Monday.
Up until last week, the Justice Department had been in settlement talks with S&P, these people said. But the negotiations broke down after the Justice Department said it would seek a settlement in excess of “10 figures,” or at least $1 billion, the people said, which would wipe out the profits of S&P’s parent, the McGraw-Hill Co., for an entire year.
McGraw-Hill earned $911 million in 2012.
A suit against S&P would be the first the government has brought against the credit ratings agencies related to the financial crisis, despite continued questions about the agencies’ conflicts of interest and role in creating a housing bubble.
By bringing a civil suit, as opposed to a criminal case, the Justice Department will have less of a burden of proof, perhaps lowering the bar for a successful prosecution.
In a statement Monday, S&P said it had received notice from the Justice Department over a pending lawsuit.
The ratings agency argued that any such legal action would be baseless, since it downgraded plenty of mortgage-backed investments, including in the two years leading up to the financial crisis. It also contended that other observers of the debt markets, including government officials, believed at the time that any problems within the housing sector could be contained.
“A DOJ lawsuit would be entirely without factual or legal merit,” the agency said in its statement. “With 20/20 hindsight, these strong actions proved insufficient — but they demonstrate that the DOJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.”