US sues Standard & Poor's for $5 bn over pre-crisis mortgage ratings

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If S&P is found to have committed civil violations, it could face fines and limits on how it does business. (Reuters) If S&P is found to have committed civil violations, it could face fines and limits on how it does business. (Reuters)
SummaryOne of biggest cases yet related to financial crisis fallout.

total revenue was $6.25 billion.

The fraudulent ratings contributed to the failure of a California credit union that required a multibillion dollar government bailout, the lawsuit said. It said Western Federal Corporate Credit Union bought the investments because of S&P's endorsement.

Western Federal was among five wholesale credit unions that regulators took over in 2009 and 2010. To wind them down, the National Credit Union Administration borrowed $11.2 billion from the Treasury. It's repaid about $6.1 billion. The agency said the costs will be paid by the credit union industry and Treasury will be fully repaid.

Critics complained that the government's action Tuesday involves civil rather than criminal charges. Criminal charges, which would carry the possibility of jail time, would be harder to prove.

Former Sen. Ted Kaufman, a Democrat who served on a panel that investigated the financial crisis, argued that actions by S&P and its employees amounted to criminal fraud.

"If you're selling something that you're saying has a certain level of safety, and you know it doesn't have that level of safety, that's fraud,'' Kaufman said.

He said big civil fines just end up hurting shareholders.

"The executives, the folks that did it, aren't going to pay anything,'' Kaufman said.

A lack of stronger evidence probably prevented Justice from seeking criminal charges against the company or its employees, said Jacob Frenkel, a lawyer formerly with the Securities and Exchange Commission.

Still, the complexity of the case could make it a model for future lawsuits against the other rating agencies, he said.

"I think the S&P case is likely to be a template for use against the other rating agencies as long as the government believes it has the evidence to make its case,'' Frenkel said.

Joining the Justice Department in the announcement were attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa and Mississippi, who have filed or will file separate, similar civil fraud lawsuits against S&P. Connecticut Attorney General George Jepsen said that by the end of Tuesday, 16 states and D.C. will have sued S&P.

According to the lawsuit, S&P didn't issue a mass downgrade of subprime-backed securities until mid-2007, even though it knew in 2006 that many borrowers were struggling or failing to make payments.

The mortgages were faring so poorly "that analysts initially thought the data contained typographical errors,'' according to the lawsuit.

In a 2007 email, another analyst said some at S&P wanted to downgrade mortgage investments earlier, "before this thing started

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