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S&P to pay $1.4 billion settlement to end probe stemming from '08 recession

Published: February 3, 2015
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Reuters/Brendan McDermid

One of the world's biggest credit rating agencies has agreed to pay United States prosecutors nearly $1.4 billion to settle claims it defrauded investors ahead of the 2008 financial crisis.

Under the terms of the settlement acknowledged on Tuesday this week, Wall Street giant Standard & Poor's will pay a total of $1.375 billion in order to settle allegations that it knowingly defrauded investors by manipulating interest rates ahead of the 2008 financial crisis.

S&P's parent company, McGraw Hill Financial Inc., said in a statement that the agreement consists of two major payments: $687.5 million to the US Department of Justice, and $687.5 million to 19 states and the District of Columbia, settling federal and regional lawsuits filed over the recession.

“After careful consideration, the company determined that entering into the settlement agreement is in the best interests of the company and its shareholders and is pleased to resolve these matters,” reads the statement in part.

The arrangement, S&P said, “contains no findings of violations of law,” ending for now a lawsuit launched almost exactly two years earlier by the Justice Department, in which federal prosecutors alleged the firm “engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs)."

Investors, mostly federally-insured financial institutions, “lost billions of dollars on CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks,” the DOJ alleged in the February 2013 suit.

“S&P falsely represented that its ratings were objective, independent and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors,” the DOJ said at the time.
Tuesday's news came only hours after S&P acknowledged reaching a separate agreement that will see to it that the California Public Employees’ Retirement System, a public pension fund, is paid $125 million to settle allegations the credit raters cost it hundreds of millions of dollars in losses.

Less than two weeks earlier, S&P settled charges of fraudulent misconduct filed by the Securities and Exchange Commission concerning its rating of commercial mortgage-backed securities, agreeing in that instance to pay more than $77 million.

S&P "elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors,” the SEC said at the time.

According to Tuesday's official statement, the latest settlement will be reflected in S&P's fourth quarter and full-year 2014 financial statements, expected for release later this month; Bloomberg analysts say McGraw Hill's net income for 2014 amounted to roughly $964 million. 

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