Colorado joins multi-state lawsuit against S&P

Colorado has joined the federal government and other states in suing Standard and Poor’s in connection to the ratings that the agency issued on structured financial securities, including residential mortgage-backed securities that were issued from 2004 to 2007.

The lawsuit is part of a joint federal-state effort to hold those responsible for their part in the foreclosure and financial crisis that led to the worst downturn since the Great Depression, said Attorney General John Suthers.

The congressionally appointed bipartisan Financial Crisis Inquiry Commission said the financial crisis “could not have happened” without rating agencies such as S & P giving AAA ratings to the sub-prime mortgage packages, according to a press release from the AG’s office.

Colorado’s lawsuit alleges that the ratings agency put its own financial interests above its objectivity and independence from the industries and securities it rates.

“This case is part of our ongoing effort to hold culpable parties responsible for the housing foreclosure crisis and protect the integrity of our financial system,” said Suthers. “Standard & Poor’s rating of structured finance securities backed by subprime mortgages was a significant factor in the crisis that occurred. Our complaint alleges that in order to protect their dominant market share, S&P executives compromised their objectivity and independence when rating these securities. Yet, S&P continues to assure the public of their complete objectivity and independence. We allege that this activity is in violation of the Colorado Consumer Protection Act.”

Structured finance securities backed by subprime mortgages were at the center of the financial and foreclosure crisis. RMBS and collateral debt obligations, derive their value from the monthly payments homeowners make on their mortgages.

The complaint alleges that S&P’s made repeated public statements from 2004 – 2012 that emphasized its independence and objectivity. Since investors and other market participants rely on S&P to be independent and objective when rating these complex financial investments, the high ratings given to mortgage-backed securities led to millions losing their pension funds. The complaint alleges that S&P adjusted its analytical models for rating RMBS and other structured finance securities to achieve the high ratings that investors needed to invest in these securities.

The complaints allege that S&P’s monitoring, or surveillance, of previously rated RMBS and CDOs, was also affected by revenue considerations. In particular, S&P delayed taking rating actions on impaired RMBS and continued rating new CDOs even after it determined that the security’s underlying collateral was impaired, because it wanted to continue to earn lucrative fees.

The federal and state lawsuits filed this week seek to restore objectivity and integrity to the ratings process. Colorado’s action was filed in Denver District Court and seeks an injunction, civil penalties and repayment of ill-gotten profits, which may total hundreds of millions of dollars.

The United States Department of Justice filed federal claims in federal court in Los Angeles. The other states filing cases against S & P include: Arizona, Arkansas, California, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania, Tennessee, and Washington. Connecticut was the first state to sue S&P on these allegations in March, 2010 and is leading the multi-state coalition. Thestates of Mississippi and Illinois filed lawsuits against S&P in 2011 and 2012, based on Connecticut’s theory of the case.

S&P and its chief competitor, Moody’s Investors Service Inc., dominate the market for rating structured finance securities and are responsible for rating virtually all structured finance securities issued into the global capital markets. Connecticut has brought a similar lawsuit against Moody’s, which is pending in state court.