By Luciana Lopez and Aruna Viswanatha
Standard & Poor's asked a federal judge on
Monday to dismiss a U.S. Justice Department civil suit against
the rating agency, arguing the government's case is based on
vague statements that cannot be used to prove fraud.
In a $5 billion suit, the U.S. government accused the rating
agency of issuing inflated ratings on faulty products to drum up
business before the financial crisis, despite company statements
that its ratings were objective.
S&P has vociferously defended itself in public since the
case was filed in February in U.S. District Court in Los
Angeles, denouncing the lawsuit as meritless and accusing the
government of cherry-picking emails to misconstrue what its
The rating agency has also moved to consolidate in federal
court a series of parallel lawsuits more than a dozen states
have filed against it.
In the Monday filing, S&P said the government cannot prove
the company engaged in fraud, adding that the banks that
packaged the structured finance deals themselves are ill-suited
to being portrayed as victims of too-lax ratings.
"From start to finish, the Complaint overreaches in
targeting S&P, a rating agency that did not create, issue, sell
or receive any interest in any security at issue in the case,"
lawyers for the ratings firm, which is owned by McGraw-Hill
Companies Inc, said in the filing.
While statements about the company's independence could be
considered corporate "puffery" and its ratings were not
particularly prescient, none of that proves fraud, the company
The 2007-2009 financial crisis was due in large part to
massive losses triggered by risky mortgage loans packaged and
sold to investors, often with top ratings from credit raters.
But the raters have escaped most liability for their ratings
from that time, since courts have largely protected them as
opinions under free speech laws.
The lawsuit, one of the most ambitious the government has
filed in response to the financial crisis, says the rating
agency engaged in a scheme to defraud investors, financial
institutions and others telling them that its ratings were
"objective, independent, uninfluenced by any conflicts of
interest that might compromise S&P's analytic judgment."
Meanwhile, the government alleges that S&P inflated ratings
and understated risks as the housing bubble started to burst,
driven by a desire to gain more business from the investment
banks that issued mortgage securities.
In its Monday filing, S&P said the government's argument
doesn't hold up, because those statements S&P made about its
independence "are altogether too general and vague to constitute
the basis for a fraud claim."
The ratings firm cited another recent federal court ruling,
upheld by an appeals court, that described similar statements as
"puffery" on which a fraud case couldn't be based.
The company also said the government can't prove the rating
agency meant to defraud investors who bought the flawed
securities - particularly as the banks themselves were the
issuers of these securities.
The suit was filed under the Financial Institutions Reform,
Recovery, and Enforcement Act, a law that covers fraud affecting
federally insured financial institutions.
"It is more than ironic that two of the supposed 'victims',
Citibank and Bank of America - investors allegedly misled into
buying securities by S&P's fraudulent ratings - were the same
huge financial institutions that were creating and selling the
very CDOs (collateralized debt obligations) at issue," S&P said
in its filing.
"In other words, the Complaint charges S&P with intending to
defraud these financial institutions about the likely
performance of their own products."
S&P's motion also recasts the internal emails and messages
the government relied on heavily in its original 119-page
While the government says those messages, which include one
analyst performing a pop song parody about the housing market
burning down, paint a picture of a company knowingly slapping
inflated ratings on structured finance products, the company's
filing says otherwise.
Those messages, instead, the company said, show internal
squabbling or even "robust internal debate."