Business & Tech

S & P Colluded With Banks Leading to Economic Collapse, Prosecutors Allege

A federal judge in Orange County gave prosecutors the nod to temporarily continue with a $5 Billion lawsuit, alleging Standard & Poor's downplayed securities risks, leading to the 2008 recession.

A federal judge in Santa Ana today tentatively ruled that prosecutors could continue with a $5 billion lawsuit alleging Standard & Poor's credit rating system fraudulently downplayed the risk in various securities, leading to the economic collapse of 2008.

U.S. District Judge David O. Carter said, however, he wanted to think about it some more and pledged to attorneys that he would -- a week from today - - finalize his ruling on Standard & Poor's motion to dismiss the lawsuit.

S&P's attorneys argued that the government's lawsuit was revenge for downgrading the nation's debt following the bruising debt-ceiling debate in 2011 that nearly led to the U.S. defaulting on its bills.

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"So you think this is payback?" Carter asked attorney John Keker, who represents S&P.

"Yes," Keker replied while questioning why S&P's rival Moody's wasn't also sued.

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Assistant U.S. Attorney George Cardona responded that Moody's has a different "set of models" for ratings.

Federal prosecutors also said they have been gathering evidence for three years in the lawsuit, which was filed in February, while S&P's attorneys argued the government's allegations of fraud were "generic" and overbroad.

Prosecutors argued that the financial industry recognized a conflict of interest going back to 2004 as S&P worked with banks and other lending institutions on how to rate complex securities such as collaterized bond obligations, or CBOs, which include a mix of risk, or collateralized debt obligations, or CDOs, which also include a range of debt and risk.

Those CDOs issued in 2007 included bundles of subprime mortgages.

S&P, prosecutors argue, issued a "code of conduct" that promised independent and unbiased ratings that investors depended upon. The company falsely promised the analysis would be separate from the business side, Cardona alleged.

"Our allegation is they allowed the issuers to influence these (rating) models," Cardona said.

A grocery store shopper who prefers organic fruit relies on the agency that certifies organic food, while investors rely on S&P for the same service when shopping on Wall Street, Cardona argued.

S&P's attorneys emphasized that the code of conduct echoed what the rating agency always stood for and continues to abide by. They further argued that prosecutors failed to show any specific instances of S&P's executives intentionally seeking to defraud investors or the banks.

Keker noted that S&P's ratings weren't any different than rival Moody's ratings during the time of the alleged fraud from the spring to fall of 2007.

Cardona replied it shouldn't matter whether the ratings agency got it right, just that it sought to downplay the risk.

Keker contended that the government has not provided any evidence to back up its $5 billion claim of losses. Cardona said further discovery would be needed to prove the losses, but that specifics were provided in the initial complaint.

Carter discussed the logistics of a trial, noting that most of the 280 or so witnesses that will have to be deposed are from the East Coast. The cost of hiring a judge to oversee depositions in New York would be expensive, Carter said.

S&P's attorneys will seek depositions from Securities and Exchange Commission and Treasury Department officials.

Getting jurors to hearing evidence for a trial that could last months will be difficult, as well, Carter said.

The judge also warned both sides not to "try this case in the press." He said Standard & Poor's is "not too big to fail," and that the negative publicity from a trial could be "devastating" to the company.

If the judge does not dismiss the lawsuit, he urged both sides to get it before a jury before 2015. If Carter does dismiss the lawsuit, he said he would do so "without prejudice," meaning prosecutors could refile the claim with revisions.

If the lawsuit is not dismissed, both sides will return for a hearing July 29.

- City News Service


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