SEC could file civil charges against some raters: report

Fri Jun 17, 2011 9:35am EDT

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A foreclosed home for sale in Santa Ana, California, May 24, 2011.

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(Reuters) - U.S. regulators could file civil fraud charges against some credit rating agencies, and settle with more Wall Street banks, for their role in developing mortgage-bond deals that helped trigger the financial crisis, the Wall Street Journal reported, citing people familiar with the matter.

The inquiry into the rating agencies broadens the U.S. Securities and Exchange Commission's (SEC) probe into the sales and marketing of mortgage-bond deals by several financial firms, the paper said.

It said other firms being probed by the SEC include JP Morgan, Citigroup, Morgan Stanley, Bank of America's Merrill unit and UBS AG.

The SEC was also reviewing the conduct of McGraw Hill's Standard & Poor's, and Moody's Investors Service, owned by Moody's Corp, on at least two mortgage-bond deals, the paper said.

JP Morgan is expected to settle within weeks allegations related to its sale of a $1.1 billion mortgage-bond investment as the market collapsed in early 2007, the paper said.

JP Morgan declined to comment to Reuters on any settlement of the collateralized debt obligations (CDOs).

Mortgage-backed securities and CDOs were at the heart of the financial crisis. Wall Street banks vacuumed up home loans, often subprime mortgages, and repackaged them into bonds and other securities that were sold with top-notch credit ratings.

When the U.S. housing market crashed, the securities plummeted in value, generating enormous losses for investors around the world.

Last year, Goldman Sachs settled civil fraud charges with the SEC for about $550 million regarding its role in marketing a subprime mortgage product.

The Journal said JP Morgan and most other banks facing fraud allegations are expected to agree to pay about half or less than the $550 million paid by Goldman.

The paper said a Standard & Poor's spokeswoman declined to comment, and it quoted Michael Adler, a spokesman for Moody's, as saying: "Although Moody's is uncertain as to what The Wall Street Journal is referring, we would certainly cooperate with any requests we receive from the SEC."

Reuters could not immediately reach Standard & Poor's or Moody's for comment. The SEC declined to comment.

The SEC is considering whether the credit ratings firms failed to do enough research to be able to rate adequately the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals, the paper said.

The SEC last month sought public comment on proposals that the credit rating agencies needed to reveal more about how they judge financial products and how those ratings perform over time.

(Reporting by Vaishnavi Bala and A. Ananthalakshmi in Bangalore; Editing by Hans-Juergen Peters and Ian Geoghegan)

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