Credit-rating agency Standard & Poor’s will pay $77 million and be barred for one year from rating certain commercial-backed mortgage securities, as part of a major settlement with US and state regulators over “fraudulent misconduct.”
The case marks the first time the Securities and Exchange Commission (SEC) has ever levied charges against one of the big three credit-raters since it first won authority from Congress in 2006 to police the sector.
The SEC said S&P will pay $58 million to settle three matters with the agency, plus another $19 million to settle parallel cases with the attorneys general of New York and Massachusetts.
“Investors rely on credit rating agencies like Standard & Poor’s to play it straight when rating complex securities,” said Andrew Ceresney, the SEC’s enforcement director.
“But Standard & Poor’s elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors,” he added.
In a statement, the company said it was settling the matters without admitting or denying the charges.
“The settlements do not affect any outstanding S&P Ratings credit ratings or the manner in which S&P Ratings conducts credit analysis under the relevant criteria,” the company said, adding it takes regulatory compliance seriously.
Most of the allegations against S&P centre around problems that arose in 2011 over its ratings of certain commercial mortgage-backed securities.
The company suffered a blow to its CMBS business that year, after a major error forced it to withdraw a rating on a $1.5 billion deal.
The SEC and state attorneys general said the company publicly misrepresented the methodology it was using to rate six different CMBS products in 2011.
In an effort to regain the market share it lost over its errors, the SEC said the company then “published a false and misleading article” claiming its new credit levels could withstand “Great Depression-era” stress levels.
New York Attorney General Eric Schneiderman said in a statement that S&P’s 2011 conduct amounted to “lying to investors” so it could bolster its profits.
In addition to charging the company, the SEC also charged former S&P executive Barbara Duka, in a related case.
Duka is planning to contest the charges in an SEC administrative court.
Her attorney, Guy Petrillo, said in a statement that his client “did not act wrongfully” and performed her duties with the “utmost good faith.”