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WASHINGTON/NEW YORK (Reuters) - Standard & Poor's will pay $77 million and be barred for one year from rating commercial mortgage-backed securities, in an unprecedented settlement with U.S. and state regulators who accused the U.S. credit rating agency of misleading investors.
This is the first time the U.S. Securities and Exchange Commission has levied civil charges against one of the Big Three credit-raters since it won authority from Congress in 2006 to police the sector. An SEC official said he expected more enforcement actions.
S&P neither admitted nor denied wrongdoing in the settlement announced on Wednesday. The deal affects securities issued by so-called conduit lenders, who originate commercial mortgages to package into securities for sale to investors.
"The settlements do not affect any outstanding S&P Ratings credit ratings or the manner in which S&P Ratings conducts credit analysis under the relevant criteria," the company said in a statement.
Research analysts downplayed the impact of the time-out period on S&P and its bottom line.
"While the one-year suspension is a black eye for S&P, it will likely have minimal financial impact given S&P's low share in this niche segment," a Piper Jaffray report said.
The commercial mortgage-backed securities (CMBS) market accounts for just 1 percent of S&P's overall revenue, Piper Jaffray noted. S&P's total 2013 revenue was about $4.9 billion, according to its annual report.
Even bigger potential settlements are on the horizon for S&P, said two sources who asked to be anonymous because the deals have not been finalized.
The McGraw Hill Financial Inc unit is close to an agreement to pay $1.375 billion to settle government lawsuits over mortgage ratings issued in the runup to the 2008 financial crisis, one of the sources familiar with the matter said. The other source said S&P was in talks to pay as much as $1.5 billion to settle the lawsuits.
The U.S. Justice Department sued the firm in February 2013, claiming more than $5 billion in losses from S&P-rated securities during the 2007-2009 financial crisis.
Under Wednesday's deal, S&P agreed to pay $58 million to settle three matters with the SEC, and $19 million to settle parallel cases with the attorneys general of New York and Massachusetts.
Unlike the Justice Department case, the charges brought by the SEC involve post-crisis actions starting in 2011.
New York Attorney General Eric Schneiderman said in a statement that S&P's 2011 conduct amounted to "lying to investors" so it could bolster profit.
The investigation found that S&P misled investors by secretly using more aggressive assumptions in its calculations than it publicly disclosed. The less conservative assumptions made them more attractive to issuers, officials said.
"These cases are a reminder that race-to-the-bottom behavior - that is, loosening of ratings standards in pursuit of market share - persists even though the crisis has ended," Andrew Ceresney, the SEC's enforcement director, told reporters on a conference call.
Most of the allegations against S&P center around problems that arose in 2011 over its ratings of certain CMBS.
S&P's CMBS business suffered a blow that year, after a major error forced it to withdraw a rating on a $1.5 billion deal.
The SEC and state attorneys general said the company publicly misrepresented the methodology used to rate six different CMBS products in 2011.
To regain the market share it lost over its errors, the company "published a false and misleading article" claiming its new credit levels could withstand "Great Depression-era" stress levels, the SEC said.
The SEC determined that S&P was not equipped to participate in rating CMBS because of inadequate internal controls.
S&P and its main U.S. rivals, Moody's Investors Service and Fitch Ratings, account for about 96 percent of all credit ratings, according to a 2012 SEC report.
Asked on a call with reporters whether the SEC was investigating other credit rating agencies for similar violations, Ceresney said the commission is very focused on the issue.
"This is an area in which I imagine there will be future activity," he said, declining to comment on particular cases.
In addition to charging the company on Wednesday, the SEC brought related civil charges against former S&P executive Barbara Duka.
Duka is planning to contest the charges in an SEC administrative court. Her attorney, Guy Petrillo, said in a statement that his client "did not act wrongfully" and performed her duties with the "utmost good faith."
Additional reporting by Nate Raymond and David Ingram in New York; editing by Susan Heavey, Noeleen Walder, Matthew Lewis and Richard Chang