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$1.375 billion multi-state settlement with Standard & Poor’s over credit rating practices leading up to 2008 financial crisis includes millions for Maine
February 4, 2015
(AUGUSTA) Attorney General Janet Mills has announced the largest ever one-time settlement in Maine history. The State of Maine filed papers Wednesday with the Superior Court settling the state’s complex lawsuit against Standard & Poor’s (S&P). The lawsuit, originally filed two years ago in Kennebec Superior Court, alleged that the credit ratings giant engaged in unfair and deceptive trade practices in connection with its ratings during the time leading up to the financial crisis of 2008. The settlement was negotiated in conjunction with the federal Department of Justice and 19 states and the District of Columbia. Maine will receive $21.5 million dollars for consumer protection efforts.
“Holding S&P accountable for these practices tells Wall Street we will not tolerate acts that deceive investors and devastate our economy,” said Attorney General Mills. “As Attorney General I will continue to work to promote transparency and protect the integrity of our financial system. This settlement shows that banks did not act alone and that the Attorneys General of the states and of the United States together will pursue any entity that violates the public trust and stacks the deck against consumers and homeowners.”
The lawsuit alleged that S&P did not fully disclose to the investing public the fact that it had a financial interest in giving some investments high ratings. While touting its ratings to investors as “independent and objective,” S&P was actually being paid for those ratings by the issuers (typically investment banks) of those complex investments such as residential mortgage backed securities (RMBS) and credit default options (CDOs).
A credit rating is an attempt to predict how likely it is that an entity that has borrowed money will pay it back. Without high ratings from credit rating agencies like S&P, investment opportunities like RMBS and CDOs could not have been sold because institutional investors will buy only highly rated investments. The lawsuit alleged that S&P allowed its ratings to be influenced by its desire to earn lucrative fees from investment bank clients.
RMBS were created by securitizing subprime mortgage loans. CDOs were created by repackaging and securitizing the already securitized RMBS. Because of S&P’s high ratings, investors eagerly purchased these RMBS and CDOs. This in turn led to the proliferation of low quality mortgages and a dramatic rise and fall in the housing market, with massive losses to the investors who purchased these products.
Attorney General Mills said her office has aggressively litigated and negotiated the case for two years. Initially S&P removed the case from Kennebec County to federal court in Maine. The case was then consolidated with cases in other states and transferred to the United States District Court for the Southern District of New York. The Attorneys General then litigated the case in New York for eight months until the federal court remanded Maine’s lawsuit back to Kennebec County, where S&P then tried unsuccessfully to have the case dismissed on jurisdictional grounds.
Attorney General Mills stated, “The Maine Attorney General’s Office is not afraid to take on big business and big cases, to litigate and to win. This case provides a significant financial disincentive to financial players who might be tempted to skirt the law and it provides ongoing oversight by the Department of Justice and the Attorneys General.”
In addition to the financial settlement, S&P has agreed to facts acknowledging conduct related to its analysis of structured finance securities. S&P also agrees to cooperate with any request for information from any state expressing concern over a possible violation of state law for the next five years. The states retain authority to enforce their unfair trade practices laws if S&P engages in similar conduct in the future. The states and federal government are filing stipulated judgments, consent judgments or similar pleadings in their lawsuits in order to implement the terms of the settlement agreement and resolve all pending proceedings.
In August 2014 the United States Securities and Exchange Commission adopted new requirements for credit rating agencies that address conflicts of interest and procedures to protect the integrity and transparency of rating methodologies and that provide for certifications to accompany credit ratings attesting that the ratings were not influenced by other business activities.
The total settlement amount is $1.375 Billion. One half of the amount was paid the United States Department of Justice to settle its case. The other half was divided among the states that sued S&P. S&P is paying the Maine Office of the Attorney General $21,535,714.00, an amount commensurate with the economic harm caused by the company’s behavior and an amount which exceeds the profits from its activities, amounting to essentially a disgorgement of S&P’s ill-gotten gains. The state’s share will be directed toward consumer protection and education efforts.
Attorney General Mills praised the work of Assistant Attorney General Linda Conti, head of the Consumer Protection Division, who traveled to New York City a number of times and who spent hundreds of hours litigating the case in state and federal courts on behalf of the State of Maine.