Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

Feb 5 2013

"Deceptive ratings played a role in nation’s financial crisis"

OLYMPIA—Attorney General Bob Ferguson today joined a group of state attorneys general and the U.S. Dept. of Justice in filing suit against Standard & Poor’s. The group alleges the credit rating agency misled investors with regard to structured finance securities backed by subprime mortgages that were at the center of the national financial crisis.

Both the state and federal complaints—including the one Washington filed in Snohomish County Superior Court today—allege that while S&P repeatedly emphasized its objectivity and independence, the credit rating agency allowed its desire to earn valuable fees from its investment bank clients to influence its analysis.

The complaints further contend S&P’s conduct resulted in the company assigning inflated credit ratings to the sub-prime assets packaged and sold by Wall Street investment banks, beginning as early as 2001and continuing as late as 2011.

Structured finance securities backed by subprime mortgages, including residential mortgage-backed securities (RMBS) and collateral debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages. The state and federal government contend these securities were ultimately to blame for much of the nation’s financial crisis.

“S&P systematically misrepresented that its analysis was objective and independent,” Ferguson said. “We now know this is not true. In fact, S&P’s analysis was improperly influenced by financial interests.

“S&P’s actions have significant real world implications for the finances of individual investors,” he continued. “These securities are often included in mutual fund and pension fund portfolios that play significant roles in people’s retirement and investment strategies.”

Washington’s complaint accuses S&P of making numerous misrepresentations to Washington consumers, including claims that:
•    S&P’s analysis of structured finance securities was independent, objective and free from consideration of S&P’s desire for revenue or additional business from issuers;
•    S&P dealt fairly and honestly with the public;  
•    S&P understood the conflicts created by an “issuer pays” business model but adequately managed and neutralized the conflicts as demonstrated by the principles set forth in S&P’s Code of Conduct;
•    S&P agreed with and implemented the principles set forth in the industry code of conduct;  and
•    S&P conducted timely and thorough surveillance on its analysis of structured finance securities to ensure that the S&P rating continues to reflect its best assessment of the risk associated with the obligation.

Washington—like other state and federal regulators—seeks:
•    A court order to force S&P to refrain from making  false representations to the public;
•    Changes in the way the company does business; and
•    Other relief consistent with the state’s Consumer Protection Act that the court may deem just and proper.

Washington state will consider amending its complaint to include civil penalties and/or restitution after additional investigation.

Connecticut was the first state to sue S&P on these allegations in March 2010.  Its lawsuit, brought under the Connecticut Unfair Trade Practices Act, is pending in Hartford Superior Court.  The States of Mississippi and Illinois filed lawsuits against S&P in 2011 and 2012, respectively.
Washington is one of many states filing similar complaints today. Others include:  Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Idaho, Iowa, North Carolina, Maine, Missouri, Pennsylvania and Tennessee.


Janelle Guthrie, Communications Director, Attorney General Bob Ferguson, 360-586-0725