Updated: March 6, 2013 6:19AM
More than a year after Illinois’ attorney general sued the rating agency Standard & Poor’s over its high grades for mortgage securities that later fell in value, the U.S. government is expected to file its own charges against the company.
The charges would mark the first enforcement action the federal government has taken against a major rating agency involving the financial crisis.
S&P said Monday that the Justice Department had informed it that it intends to file a civil lawsuit focusing on S&P’s ratings of mortgage debt in 2007. The action does not involve any criminal allegations.
S&P denies any wrongdoing and says any lawsuit would be without merit.
S&P, part of McGraw-Hill Cos. Inc., is already in court with Illinois Attorney General Lisa Madigan. She sued in January 2012, accusing the agency of falsifying high ratings for risky mortgage securities to fulfill a goal of higher revenue and greater market share. Madigan accused the company of violating the state’s Consumer Fraud Act.
A federal lawsuit would “disregard” the fact that S&P reviewed the same data on risky mortgages as the rest of the market and U.S. government officials, who publicly said in 2007 that the problems in the subprime mortgage market appeared to be limited, the company said in a statement.
In the statement, S&P said it “deeply regrets” that its ratings on some securities “failed to fully anticipate the rapidly deteriorating conditions in the U.S. mortgage market during that tumultuous time.”
Justice Department spokeswoman Nanda Chitre declined to comment on the matter.
According to a report in the New York Times, the lawsuit will likely be brought this week after settlement talks between the Justice Department and S&P broke down last week. The talks collapsed over federal authorities’ insistence that a settlement involve at least $1 billion, the Times reported.
Judges have previously thrown out claims brought by investors against the rating agencies, on the grounds that their ratings amount to free speech protected by the First Amendment.
The Illinois case was assigned to Cook County Circuit Court Judge Mary Anne Mason, who in November denied a motion by S&P to dismiss the case. S&P had argued its ratings were protected by the First Amendment.
A spokeswoman for Madigan said a status hearing for the case is scheduled in March.
S&P and the other two major agencies, Moody’s Investors Service and Fitch Ratings, have been blamed for helping fuel the crisis by assigning AAA ratings to trillions of dollars in risky securities backed by subprime mortgages. The securities later collapsed in value once the housing market bubble burst and home-loan delinquencies soared. Major U.S. banks absorbed tens of billions of dollars in losses.
The rating agencies are crucial arbiters of the creditworthiness of securities traded around the world. The grades they assign can affect a company’s ability to raise or borrow money and how much investors will pay for securities it issues.
AP with Sun-Times Business Reporter David Roeder contributing