Standard & Poor’s to Pay Almost $80 Million to Resolve SEC Charges Over Ratings Fraud Involving CMBSs

Standard & Poor’s has agreed to settle U.S. Securities and Exchange Commission charges accusing the credit rating agency of fraudulent misconduct when rating certain commercial mortgage-backed securities. As part of the settlement, S & P will pay close to $80 million—$58 million to resolve the regulator’s case, plus $12 million to settle a parallel case by the New York Attorney General’s Office, and $7 million to resolve the Massachusetts Attorney General’s case.

The SEC put out three orders to institute resolved administrative proceedings against the credit rater. One order dealt with S & P’s practices involving conduit fusion SMBS ratings methodology. The Commission said that the credit rating agency’s public disclosures misrepresented that it was employing one approach when a different one was applied to rate several conduit fusion CMBS transactions, as well for putting out preliminary ratings on two transactions. To resolve these claims S & P will not rate conduit fusion CMBSs for a year.

The SEC’s second order said that after S & P was frozen out of the market for its conduit fusion ratings in 2011, the credit rating agency published a misleading and false article claiming to show that it’s overhauled credit ratings criteria enhancement levels could handle economic stress equal to “Great Depression-era levels.” The Commission said that S & P’s research was flawed, were made based on inappropriate assumptions, and the data used was decades off from the Depression’s serious losses. Without denying or admitting to the findings, S & P has consented to publicly retract the misleading and false data about the Depression era-related study and rectify inaccurate descriptions that were published about its criteria.

In the third order, the regulator addressed the internal control failures in the credit rating agency’s surveillance of ratings of residential mortgage-backed securities. According to the SEC, S & P let there be breakdowns in the way it performed ratings surveillance of RMBS that were previously rated from 10/12 to 6/14. S & P modified a key assumption so that its ratings were less conservative and they were not consistent with the assumptions in its published criteria about its ratings methodology. The credit rater is accused of disregarding internal policies for modifying surveillance criteria and, instead, using ad hoc workarounds of which investors were not fully apprised.

S & P has consented to extensive undertakings to improve its internal controls environment. However, it is not denying or agreeing to the findings in the order.

Regarding NY’s CMBS ratings case, Attorney General’s Eric T. Schneiderman said that for several months in 2011, S & P “loosened” its criteria when rating eight CMBS, did not tell investors about this, and misled market participants into thinking that investments’ ratings were determined by more conservative assumptions than what was applied. He said that his actions, as well as those of the Massachusetts Attorney General’s office and the SEC, are part of their efforts to hold S & P accountable so that credit rating agencies know that they have to give investors “rigorous and honest” ratings. Speaking about her office’s settlement, Massachusetts Attorney General Maura Healey said that there would be no tolerance shown toward credit rating agencies that “compromise” their ratings’ “integrity” for “financial gain.”

The settlement was a joint federal-state collaboration between the SEC and the two AG offices.

Our commercial mortgage-backed securities lawyers represent investors in recouping their fraud losses.

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