Securities Litigation

On February 3, the Department of Justice and 19 State Attorneys General announced their $1.375 Billion settlement of DOJ's FIRREA suit and related State AG actions against Standard & Poor's and its parent McGraw-Hill Companies over ratings practices in CDO and RMBS securities contributing to the 2007-2008 financial crisis. The companies entered a separate $125M settlement with Calpers, California's public retirement system. S&P will pay half the $1.375 Bn to DOJ (as a FIRREA "civil monetary penalty"), and the other half among the various State AG plaintiffs ($25M to Tennessee - a representative amount). The Wall Street Journal reported Tuesday that the fine represented about 30% of McGraw-Hill's annual revenues and ten-fold that next largest such settlement. Still, others criticized the settlement for lacking admissions of wrongdoing or prosecution of individuals. S&P did "acknowledge" a written statement of facts accompanying the settlement. Those facts revealed that S&P varied CDO Evaluator Model updates and default matrices to respond to competitive market pressures by suppressing more critical results. Settlement Annex 1 - Statement of Facts at ¶ ¶ 4-5. The company also slowed or tempered RMBS downgrades from the extent indicated by internal surveillance reports. Id. at ¶ ¶ 6-14. The Covered Conduct focused principally upon the period from 2004 through 2007. The Federal releases cover that period, although many State AG releases extend through 2012. In the Settlement, S&P undertakes to comply with various State consumer-protection laws and provide a streamlined response to any future inquiries under those statutes. The Settlement creates no third-party rights. Notably, S&P agreed to expressly withdraw its affirmative-defense allegation that the Federal suit was brought in part to retaliate for its downgrade of US Treasury debt. I wrote last week about S&P's companion SEC settlement and one-year suspension from fusion CMBS ratings here. The Federal action is United States v. McGraw-Hill Companies, Inc., et al., No. CV-13-00779-DOC (USDC - CDCA filed Feb. 4, 2013). The State actions include Tennessee ex rel. Slatery v. The McGraw-Hill Companies, Inc., et al., No. 13C506 (Davidson County Circuit Ct, TN, filed Feb. 5, 2013). The Settlement is here. The word on the Street is that Moody's is up next. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile here. © 2015 by Thomas K. Potter, III (all rights reserved).