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Ex-S&P exec avoids industry bar in SEC mortgage bond case
August 29, 2017 / 10:10 PM / a month ago

Ex-S&P exec avoids industry bar in SEC mortgage bond case

Aug 29 (Reuters) - An administrative judge on Tuesday ruled that a former Standard & Poor’s executive should be censured but not barred from the industry for negligently failing to disclose to investors a change in how commercial mortgage-backed securities were rated.

The U.S. Securities and Exchange Commission (SEC) had accused Barbara Duka, the former head of S&P’s commercial mortgage-backed securities group, of committing fraud by not disclosing the 2011 change in order to help her employer generate business.

But SEC Administrative Law Judge James Grimes rejected claims by the agency’s enforcement division that she engaged in fraud, saying the “devil is in the details.”

“Although it is clear that Duka sought to, and did, change S&P’s methodology, there is no evidence she did so for a commercial purpose or any reason other than the belief that the change was analytically justified,” he wrote.

Grimes said she instead was merely negligent in failing to ensure that the methodological change was disclosed in reports distributed to investors.

Grimes declined to follow the enforcement division’s request that he bar Duka from associating with a ratings organization and penalize her $150,000, instead imposing only a censure and a $7,500 penalty.

The SEC declined to comment.

Guy Petrillo, Duka’s lawyer, said in a statement the SEC’s fraud claim was one “that was never supported and that should never have been brought.”

“Barbara always acted in the utmost good faith while employed by S&P,” he said.

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.

A federal judge in 2015 issued an order blocking the SEC from moving forward with its case. But a federal appeals court vacated that injunction in June 2016, allowing the case to go to trial later that year. (Reporting by Nate Raymond in Boston, editing by G Crosse)

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