April 15, 2014 / 8:45 PM / 5 years ago

UPDATE 3-S&P fails to split up $5 billion U.S. fraud lawsuit

(Adds Justice Department and S&P comments, details from decision, paragraphs 3, 5, 7-8)

By Jonathan Stempel

April 15 (Reuters) - A federal judge on Tuesday rejected a request by Standard & Poor’s to split up the U.S. government’s $5 billion lawsuit accusing it of lying about its credit ratings, paving the way for a single trial in the civil fraud case.

U.S. District Judge David Carter in Santa Ana, California, nonetheless gave S&P, a unit of McGraw Hill Financial Inc , access to evidence that the lawsuit may have been in retaliation for the agency’s Aug. 5, 2011 decision to lower the U.S. credit rating to “AA-plus” from “triple-A.”

He stopped short of giving Standard & Poor’s Ratings Services access to White House records from that time, but said he would consider such a request later.

S&P has said former U.S. Treasury Secretary Timothy Geithner angrily told McGraw Hill Chairman Harold “Terry” McGraw in an Aug. 8, 2011 phone call that he was “accountable” for an alleged $2 trillion math error, and that S&P’s conduct would be “looked at very carefully.”

Carter also ordered the U.S. Department of Justice to turn over all documents from probes of potential fraud related to residential mortgage-backed securities issued between 2004 and 2008. “Compliance with these requests will be burdensome to the government, but that burden is not undue,” the judge wrote.

The February 2013 lawsuit accused S&P of adding fuel to the 2008 financial crisis, and causing losses for federally insured banks and credit unions, by inflating ratings to boost fees from issuers, and being slow to downgrade souring mortgage debt.

S&P spokesman Edward Sweeney said: “We are pleased that the court granted our discovery request and has compelled the DOJ to provide the information S&P needs to fully defend against these meritless claims.”

Ellen Canale, a Justice Department spokeswoman, said agency officials are reviewing the decision. A Treasury Department spokesman referred a request for comment to the Justice Department.


S&P had proposed holding a trial in two parts, with the first focusing on 17 of the roughly 160 securities at issue, where Citigroup Inc was alleged to have suffered losses.

It said this would simplify the case for jurors and avoid a need to present “overwhelming” amounts of evidence.

But the judge said “facts that are common to all, or nearly all, of the securities” at issue underlay the government’s case.

“It is true that each security will raise issues unique to particular financial institutions,” he wrote. “But, the heart of each of the government’s claims is that S&P engaged in a ‘scheme to defraud.’”

He also agreed with the government that holding two trials could violate the Seventh Amendment of the U.S. Constitution, by allowing different juries to review many overlapping issues.

The trial is scheduled for Sept. 29, 2015.


S&P fared better with its “selective prosecution” defense, in which it claims the government interfered with its free speech rights by retaliating for a rating downgrade that was a result of Washington’s inability to manage the nation’s debt.

U.S. officials have denied that the lawsuit and downgrade were linked, though the government did not sue S&P rivals Moody’s Investors Service and Fitch Ratings over their ratings.

Carter ordered the government to produce relevant documents to the defense that are not protected by White House privilege.

The judge called evidence of discriminatory intent “circumstantial but sufficient,” saying that Geithner had “personally expressed his anger” to Terry McGraw just minutes after speaking to President Barack Obama and other officials.

“It is unclear whether there is a nexus between his displeasure and the Department of Justice’s litigation decisions,” Carter wrote, referring to Geithner.

Jenni LeCompte, a spokeswoman for Geithner, maintained that the allegation that Geithner “threatened or took any action to prompt retaliatory government action against S&P is false.”

McGraw Hill ended 2013 with $1.54 billion of cash and equivalents. Shares of the New York-based company closed Tuesday up 40 cents at $73.38 on the New York Stock Exchange.

The case is U.S. v. McGraw-Hill Cos et al, U.S. District Court, Central District of California, No. 13-00779. (Reporting by Jonathan Stempel in New York; Editing by Steve Orlofsky and Lisa Shumaker)

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