(Reuters) - The Securities and Exchange Commission on Monday took a former Standard & Poor’s executive to trial over claims that she engaged in a fraud that inflated ratings of commercial mortgage-backed securities.
At the start of an administrative trial in Manhattan, SEC lawyer Stephen McKenna said Barbara Duka, the former head of S&P’s commercial mortgage-backed securities group, failed to disclose to investors a change she made in 2011 in how her team calculated ratings.
She instituted that change, he said, after S&P lost market share following the 2008 financial crisis for rating newly issued commercial-backed securities due to what Duka in an email said was its “more conservative criteria.”
To generate more business, Duka switched to ratings criteria that were friendlier to issuers, McKenna said. That change went undisclosed to investors, who believed S&P’s ratings remained conservative, he said.
“Ms. Duka kept these investors in the dark about this change,” McKenna said in his opening statement.
Guy Petrillo, Duka’s lawyer, countered that while some mistakes within S&P might have occurred, Duka never had any intention of defrauding investors. Her group generated “fair and accurate” ratings for the mortgage bonds, he said.
“This case has no merit whatsoever,” Petrillo told SEC Administrative Law Judge James Grimes.
The SEC filed its administrative case against Duka in 2015 as the regulator and two state attorneys general announced a $77 million settlement with S&P, then a unit of McGraw Hill Financial Inc and now part of S&P Global Inc.
The case came after Goldman Sachs Group Inc and Citigroup Inc were forced in 2011 to pull a $1.5 billion commercial mortgage-backed securities offering after S&P informed them of an internal review of its ratings.
Before being charged, Duka filed a lawsuit against the SEC challenging its authority to pursue enforcement cases in-house, rather than in federal court.
The case was one of several where defendants objected to the SEC’s use of in-house courts, saying the appointment of the presiding judges and hurdles that can make it impossible for the president to remove them are unconstitutional.
U.S. District Judge Richard Berman last year issued an order blocking the SEC from moving forward with its case. But a federal appeals court vacated that injunction in June.
The SEC is seeking financial penalties as well as a bar on Duka associating with a ratings organization.
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