Analysis - U.S. lawsuit casts a pall over S&P

Tue Feb 5, 2013 10:09pm EST
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By Lauren Tara LaCapra and Karen Freifeld

(Reuters) - Lawyers for Standard and Poor's, responding to a U.S. government probe, have tried for months to show it did nothing wrong in rating exotic securities in the run-up to the financial crisis.

In one meeting, the McGraw-Hill Cos Inc MHP.N unit, which owns Standard & Poor's Financial Services LLC, made a two-hour presentation in front of about 50 lawyers from the Department of Justice and the Securities and Exchange Commission, a source familiar with the matter said on Tuesday.

But the Justice Department stood firm, telling S&P lawyers that their views were "miles apart," the source said.

The government asked for a payment of "10 figures-plus" - or at least $1 billion - and for S&P to admit to wrongdoing to settle the probe, another source familiar with the situation said. The company refused, fearing a settlement would not only be prohibitively expensive but also open the floodgates for investors and others to bring suit, the source said.

The ratings agency will now face the government in court and potentially more lawsuits from private parties, including shareholders.

The Justice Department filed a civil lawsuit against S&P on Monday night. It is seeking $5 billion in civil damages, which one of the sources said came to about 385 times the $13 million in revenue it earned from the transactions at issue.

The federal government's accusations - of double-dealing, fraud and conflicts of interest - renew questions that have dogged ratings agencies since the onset of the financial crisis.

"This is a very serious challenge," said Edward Atorino, an independent analyst with The Benchmark Company. "It resurrects all the legacy concerns about ratings agencies."   Continued...

A U.S. flag is reflected in a window of the Standard and Poor's building in New York February 5, 2013. REUTERS/Brendan McDermid