Standard & Poor's has been fined nearly $80m (£53m) and suspended from rating certain kinds of mortgage-backed securities by the Securities and Exchange Commission to settle a case of “fraudulent misconduct”.
In the first case of its kind, S&P has paid the SEC a $58m settlement. In addition it has paid out $19m to settle parallel cases with the New York attorney general's office ($12m) and the Massachusetts attorney general's office ($7m).
The agency has also agreed “a one-year time-out” from rating conduit fusion commercial mortgage-back securities (CMBS)
The US financial watchdog had three proceedings against S&P.
One concerned its CMBS ratings methodology, with the agency admitted to having “misrepresented”. The SEC said it claimed to be “using one appraoch when it actually used a different methodology”.
The SEC's second claim was that S&P had “published a false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress”.
The watchdog claimed S&P's research was “flawed and inappropriate”, and the data it used was “decades” out of date. It also noted that the original author had flagged concerns about the way the study was being used.
The third part of the case concerned failings with S&P's internal controls, which meant there were breakdowns (plural) in the way it conducted ratings of residential mortgage-backed securities between October 2012 and June 2014.
“S&P changed an important assumption in a way that made S&P’s ratings less conservative, and was inconsistent with the specific assumptions set forth in S&P’s published criteria describing its ratings methodology,” the SEC said today. “S&P did not follow its internal policies for making changes to its surveillance criteria and instead applied ad hoc workarounds that were not fully disclosed to investors.”
Director of the SEC's enforcement division Andrew Ceresney claimed S&P had “elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors”.
“These enforcement actions, our first-ever against a major ratings firm, reflect our commitment to aggressively policing the integrity and transparency of the credit ratings process.”
Separately, the SEC is alleging that the former head of S&P's CMBS group Barbara Duka “fraudulently misrepresented” the way it calculated “a critical aspect” of ratings in 2011.
The watchdog believes Duka encouraged a move towards “more issuer-friendly ratings criteria”, and failed to disclose the less rigorous methodology. The matter against Duka will be scheduled for a public hearing before an administrative law judge.