UPDATE 1-S&P discloses talks with DOJ in credit rating probe

Thu Jul 26, 2012 1:09pm EDT

By Aruna Viswanatha and Sarah N. Lynch

WASHINGTON, July 26 (Reuters) - The U.S. Department of Justice and securities regulators are probing potential violations by credit-rating agency Standard & Poor's in connection with its ratings of structured products, the company said on Thursday.

McGraw Hill's S&P disclosed the investigations by the civil division of the Department of Justice and the U.S. Securities and Exchange Commission in a securities filing.

McGraw Hill said in the filing that it has been in talks with the government about why it believes charges should not be brought against S&P or its employees.

S&P has previously disclosed an SEC probe into its ratings of a specific structured product known as "Delphinus CDO 2007-1."

It is unclear whether the SEC's investigation into the ratings of Delphinus, a collateralized debt obligation that soured during the financial crisis, is the same as the SEC and DOJ probes that were disclosed by the company on Thursday.

Edward Sweeney, a spokesman for S&P, declined to comment beyond the filing.

If the SEC and DOJ ultimately file charges against S&P, it would mark the first enforcement action against any of the major big three credit-rating agencies, which include S&P, Moody's and Fimalac SA's Fitch Ratings.

Credit-rating agencies have been blamed for helping fuel the 2007-2009 financial crisis after they assigned glowing ratings to complex products like CDOS, which are bundles of securitized mortgages. Many of those mortgage-backed securities consisted of subprime loans that went bad as homeowners defaulted.

Critics have complained about a lack of cases against credit-raters for their roles in the financial crisis.

Earlier this month, Mizuho Financial Group settled civil charges with the SEC alleging that its U.S. unit obtained false credit ratings on the 2007 Delphinus CDO deal, which S&P rated.

S&P was not charged by the SEC in that case, but the agency said its investigation was ongoing.