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(Reuters) - A federal judge has made a tentative ruling to let the U.S. government pursue its $5 billion civil lawsuit accusing Standard & Poor's of defrauding investors by inflating credit ratings prior to the recent global financial crisis.
In a ruling made public late on Monday, U.S. District Judge David Carter in Santa Ana, California, said the government had sufficiently alleged that S&P intended to deceive investors with ratings that were objectively and subjectively false.
Carter said the complaint described in "comprehensive detail" how the largest U.S. credit rating agency had "clear knowledge" that collateralized debt obligations it rated were backed by deteriorating residential mortgage-backed securities, but failed to downgrade its ratings.
S&P is a unit of McGraw Hill Financial Inc MHFI.N. It has maintained that the lawsuit lacks merit. Fourteen U.S. states and the District of Columbia are suing S&P over similar claims in the U.S. District Court in Manhattan.
The U.S. Department of Justice's 119-page complaint filed on February 4, set out a slew of internal warnings that investigators say show how S&P falsely represented that its ratings from 2004 to 2007 were objective and untainted by conflicts of interest.
It said S&P rated more than $2.8 trillion of RMBS and nearly $1.2 trillion of CDOs from September 2004 to October 2007, and was motivated to inflate ratings to add market share and win more fees from issuers and bankers that pay for its ratings.
Carter said the complaint set forth a dissonance between S&P's stated policies, including that ratings "shall not be affected" by ties to issuers, and what actually occurred.
"The court cannot find that all of these 'shalls' and 'must nots' are the mere aspirational musings of a corporation setting out vague goals," Carter said. "Rather, they are specific assertions of current and ongoing policies that stand in stark contrast to the behavior alleged by the government's complaint."
Citing other court decisions, S&P has argued that statements about the integrity of its ratings constitute "puffery" that cannot justify the government's fraud lawsuit.
The government sued under the Financial Institutions Reform, Recovery and Enforcement Act, a 1989 law passed after the savings and loan crisis that lets the government seek penalties for losses affecting federally insured financial institutions.
An S&P spokeswoman declined to discuss Carter's ruling. A Justice Department spokesman had no immediate comment.
Carter plans to issue a final ruling by July 15.
S&P's main rivals are Moody's Corp's (MCO.N) Moody's Investors Service and Fimalac SA's LBCP.PA Fitch Ratings. They have not been hit by federal lawsuits similar to the S&P case.
The case is U.S. v. McGraw-Hill Cos et al, U.S. District Court, Central District of California, No. 13-00779.
Additional reporting by Dana Feldman; Editing by Gerald E. McCormick and Maureen Bavdek