S&P Claims US Government’s Fraud Case over Ratings is Unworkable

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By Michael Klimes | December 3, 2013 10:03 PM EST

Standard & Poor ratings agency is accused by the US Justice Department of defrauding investors by rating securities in the wrong way (Reuters)

Standard & Poor's has said the US Justice Department's broadening of fraud allegations against the ratings agency to cover many more structured debt products would make the trial unworkable.

The Justice Department chose 107 collateralised-debt obligations and 56 mortgage-backed securities rated by S&P, to inform claims that the agency played a part in defrauding investors, according to a joint filing in the federal court at Santa Ana, California,

"Instead of narrowing its case, the government now proposes that discovery and trial in this action will concern more than five times as many securities as it identified in the complaint," S&P said in a filing.

CDOs are complex financial products seen as a major element in the collapse of the US housing market in 2008, which precipitated global financial meltdown.

A conference has been set for December 16 by US District Judge David Carter to help define how big a case the government can bring before a jury and how long both sides will have to prepare for trial.

According to the Justice Department, this year's trial against the Bank of America for its Countrywide Unit in New York could be an example of how a case could isolate S&P's liability, based on the securities it rated.

That case against Bank of America involved similar allegations regarding about 11,00 loans, for example.

Bank of America, the second-largest US bank by assets, was called upon by the US government to pay $863.6m (£527m, €637m) in damages for defective mortgages sold by its Countrywide unit.

However, S&P is claiming that pre-trial information exchange for the more than 150 securities would take at least two years to evaluate.

S&P said the judge should limit the case to securities bought by Citigroup which bought more of them and suffered more alleged losses than any other entity.

The ratings agency became embroiled in a legal battle with the US government earlier this year.

On February 4, 2013, the US government made a complaint against S&P that the ratings agency knew about the dangers on securities before the credit crisis, and downplayed them in order to win business from investment banks.

S&P denied the allegations and said it has been targeted because it was only credit agency that downgraded US debt.

The Justice Department said in yesterday's filing that S&P's argument against the government's expansion of the case is "flawed".

It is neither improper nor unusual for allegations to involve more securities than the 26 CDOs it referred to by name in the complaint, it said.

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