* Says open to reasonable settlement
* Company may no longer be able to use First Amendment
* EPS from cont ops $0.67 vs $0.37 a year earlier
* Shares little changed
By Jochelle Mendonca
Feb 12 The parent of credit ratings agency
Standard & Poor's Corp, which was hit with a $5 billion fraud
lawsuit by the U.S. government last week, fired back on Tuesday,
saying it doesn't believe the government has a case.
McGraw-Hill Cos Inc said S&P has a record of
successfully defending itself against suits like the one by the
U.S. Department of Justice that accuses it of duping investors
by presenting its ratings as objective.
"The company does not believe the Department of Justice can
prove that this failure -- common to nearly everyone at the time
-- was the product of intentional misconduct by anyone at S&P,"
McGraw-Hill said in a statement accompanying its fourth-quarter
Even so the company, which is also fending off legal
challenges from states including Connecticut and California,
said it was open to discussing reasonable settlements.
Settlement talks over the suit collapsed before the
announcement of the $5 billion suit after the government sought
a penalty of more than $1 billion along with admissions of
wrongdoing, which would have exposed the company to other
lawsuits, a source close to S&P told Reuters last week.
"The rating agencies were able to fend off most of the
litigation they faced until recently because they effectively
used the First Amendment as a legal shield," BTIG analyst Mark
Palmer said in an email. "It's not at all clear that they will
be able to use that defense going forward," he said.
Floyd Abrams, a noted First Amendment lawyer who has
defended S&P in dozens of lawsuits over its ratings, has said
that freedom of speech may not be a defense in the current
cases, which are more related to deceptive conduct, and that the
firm was more than ready to go to trial.
Shares of the company, which have lost nearly a quarter of
their value since the government launched the suit, were flat at
$44.29 in early afternoon trade on the New York Stock Exchange.
McGraw-Hill General Counsel Kenneth Vittor said the Justice
Departments suit provided specifics on only about $500 million
of losses suffered by federally insured institutions, while
seeking $5 billion in penalties.
S&P earned less than $15 million from the collateralized
debt obligations (CDOs) named in the complaint, Vittor said in a
conference call with analysts and investors.
Vittor said the complaint also ignored the fact that all the
CDOs that it identified in the case had received a virtually
identical rating from at least one other credit rating agency.
CDOs are bundles of debt securities based on assets such as
mortgages. Leading up to the financial crisis, many of the
mortgage-backed assets included in CDOs consisted of subprime
loans that later soured.
S&P rival Moody's Corp is also expected to be
targeted in a Federal government lawsuit over the agency's
pre-crisis debt ratings.
McGraw-Hill, which said S&P has beaten 41 cases related to
its ratings, does not specifically disclose legal expenses but
Chief Financial Officer Jack Callahan said legal costs were "not
insignificant" in 2012 and could increase this year.
"I think we would like to believe at this point in time that
we can manage it," Callahan said on the call.
Apart from Abrams, S&P has hired John Keker, one of the
country's top white-collar defense attorneys, to fight the
The combative Keker won credit from legal experts in 2006
when Andrew Fastow, considered the mastermind of the Enron
fraud, was sentenced to only six years in prison.
McGraw-Hill's fourth-quarter profit from continuing
operations jumped 76 percent, helped by a surge in debt
issuance. Income from continuing operations rose to $190
million, or 67 cents per share, from $113 million, or 37 cents
per share, a year earlier.
Revenue rose 22 percent to $1.23 billion.
Adjusted earnings per share from continuing operations
amounted to 75 cents per share, compared with the average
analyst estimate of 72 cents, according to Thomson Reuters
McGraw-Hill posted a net loss of $216 million during the
quarter, including one-time costs related to the sale of its
education unit to Apollo Global Management LLC in
The company said in November it would take a non-cash
impairment charge of about $450 million to $550 million in the
fourth quarter to mark down the value of the unit.
It said on Tuesday it expected 2013 adjusted earnings of
$3.10 to $3.20 per share for McGraw Hill Financial, which
includes S&P. It said it expects high-single digit percentage
growth in revenue for the unit this year.
"The results and outlook were outstanding," Benchmark Co
analyst Edward Atorino said. "McGraw Hill is in a great
fundamental position. We'll see if the Justice Department's case
can stick but that will take a couple of years."