http://www.nakedcapitalism.com/2013/02/should-we-take-the-department-of-justices-suit-against-standard-poors-seriously.html
http://jessescrossroadscafe.blogspot.com/2013/02/here-is-prediction-about-sp-ratings.html
No, I do not predict that there will be no criminal indictments and convictions to follow the suit, or even serious personal penalties from the civil action beyond something that is tax deductible as a cost of doing business. That is like predicting that a heavy rain will make puddles.
I predict that the primary defense that will be offered by S&P will be based on 'the credibility trap' itself.
The usual defense in cases like this is the First Amendment, that S&P was merely voicing an opinion. In this particular case, after having combed through over 20 million documents, the Department of Justice will attempt to prove that S&P was not merely voicing an opinion, but lying for gain, which is not 'protected speech.'
And most of them obviously cannot use the CEO defense of non-involvement and general ignorance of the entire situation, since they were being paid to write professionally informed judgements based on a factual due diligence. It would be like a surgeon arguing against malpractice because he was watching porn while performing surgery, and was so distracted he did not really notice what he was doing and was therefore merely a hapless bystander. Don't laugh. It seems to be working for MF Global, and several national governments.
Having these usual avenues thwarted, I suggest that S&P will point to all the other credible voices of the economists and politicians, 'very serious people,' who said either absolutely nothing, or voiced similarly misplaced opinions and 'mistakes in judgement' about the true nature of the unfolding financial frauds. How can you blame us, when no one of consequence said anything differently, forcefully.
So rather than key actors in a massive control fraud, they will portray themselves as hapless victims of the same mass delusion that affected most of the New York-London-Washington establishment, with many top universities in their supporting cast.
Will Alan Greenspan offer to be an expert witness on the perils of mistakes made while blinded by a sincerely held ideological delusion? Poor fellow, just a good chap making an honest error in judgement. He used a bad model. Who can blame him.The defense will be 'the credibility trap' itself. You cannot convict us, without indicting yourself.
And if they are as I think they are, the S&P team will bring some credible implications of their case for the sacrosanct TBTF crowd to the plea bargaining process, and make its objective the best terms in a settlement while admitting no wrongdoing. We chose to settle because it was cheaper. We are victims of big government. The usual suspects will run with that.
It is a corollary to the credibility trap that no one who knows 'where the bodies are buried' will be personally inconvenienced beyond mere appearances.
It will be interesting to see how this plays out. It might set the tone for the 'investigations' of the coming collapse and scandal in the paper silver market. How could we have done anything wrong when the CFTC investigated us for five years, and sat next to our people almost every day?
Submitted by Tyler Durden on 02/05/2013 11:30 -0500
TUESDAY, FEBRUARY 5, 2013
Should We Take the Department of Justice’s Suit Against Standard & Poor’s Seriously?
I know cynicism-hardened Naked Capitalism readers will expect the answer to the question in the headline to be “no”. But based on a summary of the filing at Bloomberg (and having conferred with lawyers on this beat), the answer looks more like “possibly yes”.
The reason to be skeptical of lawsuits against ratings agencies is that despite the monstrous damage done by crap ratings, suits against ratings agencies by aggrieved investors have gone all of nowhere. It isn’t a matter of evidence; there is overwhelming evidence that the agencies did a crappy job on structured credit ratings
and that lots of investors really, truly relied on them. The issue is coming up with a legal theory.
and that lots of investors really, truly relied on them. The issue is coming up with a legal theory.
So far, the ratings agencies have proven to be pretty much impervious to litigation. They’ve been able to rely on two lines of defense. The first, as absurd as it may seem, is First Amendment, to say that their ratings are simply journalistic opinions. There has only been some limited qualification of that position. For instance, judge Shira Scheindlin denied a rating agency motion to dismiss, on the ground that the ratings were of relevance to such a small group of investors so as not to qualify for First Amendment protection. But this ruling was narrow . The court distinguished private placement ratings from public ratings, with private ratings having less First Amendment protection. Mortgage backed securities ratings were public and so this line of argument would not apply to them. CDOs were typically 144A offerings. CDOs were almost always listed on the Irish Stock Exchange, so it would be hard to argue that the ratings were not public.
In addition, the unfavorable rulings were on asset backed commercial paper, where the issuer had much more interaction with the rating agencies. The courts courts took the view that the agencies did more than just provide an opinion – they had been involved in structuring the deals and were therefore entitled to less First Amendment protection. It’s harder to make that case for typical CDOs, since the rating approach for them typically model driven and formulaic.
The other line of defense is that the legislation authorizing the rating agencies as nationally recognized statistical ratings organizations give them significant protections if they stay within the relatively limited restrictions of those rules. In the past, the Federal government has tried overcoming these considerable obstacles by using other legal theories. For instance, the Department of Justice launched an antitrust suit against Moody’s in the 1990s.
So the reason the Department of Justice civil suit might be the real deal is that it is using a new legal theory and is focusing on a comparatively small number of specific transactions. As Bloomberg states:
The U.S. Justice Department filed a complaint yesterday in federal court in Los Angeles, accusing McGraw-Hill and S&P of mail fraud, wire fraud and financial institutions fraud. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the U.S. seeks civil penalties of as much as $1.1 million for each violation. McGraw-Hill’s shares tumbled the most in 25 years yesterday when it said it expected the lawsuit, the first federal case against a ratings company for grades related to the credit crisis.
S&P issued credit ratings on more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the complaint. S&P downplayed the risks on portions of the securities to gain more business from the investment banks that issued them, the U.S. said.
“It’s a new use of this statute,” Claire Hill, a law professor at the University of Minnesota who has written about the ratings firms, said in a phone interview from Minneapolis. “This is not a line to my knowledge that has been taken before.”
Despite the sweeping language, the case focuses on approximately 40 CDOs issued during the toxic phase of the bubble. The New York Times reports that S&P earned about $13 million rating these deals. The New York Times explains why the use of FIRREA puts a comparatively small number of transactions in the crosshairs:
The government is taking a novel approach by accusing S.& P. of defrauding a federally insured institution and therefore injuring the taxpayer.
Among others, the compliant includes the demise of Wescorp, a federally insured credit union in Los Angeles that went bankrupt after investing in mortgage securities rated by S.& P. Wescorp is included as one example of the contended fraud, and as a way to bring the case in California. The suit was filed in Federal District Court for the Central District of California.
The linchpins are that first, that the DoJ is using FIRREA. Second, the government is accusing Standard and Poor’s of conflict of interest (favoring banks and increased market share) and disregarding risks and failing to adhere to their stated approach to ratings. The key phrase: S&P falsely represented to investors that its ratings were objective, independent and uninfluenced by any conflicts of interest.
The Times reports that the suit was filed because settlement negotiations fell apart:
Settlement talks between S.& P. and the Justice Department broke down in the last two weeks after prosecutors sought a penalty in excess of $1 billion and insisted that the company admit wrongdoing, several people with knowledge of the talks said. That amount would wipe out the profits of McGraw-Hill for an entire year. S.& P. had proposed a settlement of around $100 million, the people said.
S.& P. also sought a deal that would allow it to neither admit nor deny guilt; the government pressed for an admission of guilt to at least one count of fraud, said the people. S.& P. told prosecutors it could not admit guilt without exposing itself to liability in a multitude of civil cases.
As indicated, the reason this suit might fly is that the causes of action rely on different statues than previously invoked, and the focus is on S&P’s misrepresentation of its own process: that it presented it as objective and unbiased, when it had significant conflicts of interests and its employees believed it was concerned only about profit, and that it may also have failed to adhere to its own procedures.
While getting a ratings agency scalp is small potatoes compared to getting the executives at one of the many financial institutions that helped bring about the crisis, I’ll take my victories where I can get them. Winning a case against a public company that is really keen not to lose (tons of private litigation would follow) would break a long losing streak in the DoJ and SEC on the finance front. Although the agencies have been craven, they apparently really were demoralized after losing their misguided suit against Bear Stearns hedge fund managers, and they’ve been gun shy. That does not mean they would not have lost in a fight against the Treasury if they had wanted to go after any targets, but let’s not kid ourselves: these fights never occurred. Breuer in a significant role was also a big part of the problem, but people who know something about the DoJ say the agency’s learned timidity was an even bigger impediment. They really lost their mojo after the Bear Stearns fiasco. You could have imagined a less cowardly DoJ filing suits against safe and obvious targets like WaMu.
Let’s hope that the DoJ’s prosecutorial efforts live up to the caliber of their filing. Too often the Feds have proven to be great draftsmen but lousy prosecutors. We’ll see if they can up their game.
http://jessescrossroadscafe.blogspot.com/2013/02/here-is-prediction-about-sp-ratings.html
05 FEBRUARY 2013
Enter the Credibility Trap: A Prediction About the S&P Ratings Lawsuit
I predict that the primary defense that will be offered by S&P will be based on 'the credibility trap' itself.
The usual defense in cases like this is the First Amendment, that S&P was merely voicing an opinion. In this particular case, after having combed through over 20 million documents, the Department of Justice will attempt to prove that S&P was not merely voicing an opinion, but lying for gain, which is not 'protected speech.'
And most of them obviously cannot use the CEO defense of non-involvement and general ignorance of the entire situation, since they were being paid to write professionally informed judgements based on a factual due diligence. It would be like a surgeon arguing against malpractice because he was watching porn while performing surgery, and was so distracted he did not really notice what he was doing and was therefore merely a hapless bystander. Don't laugh. It seems to be working for MF Global, and several national governments.
Having these usual avenues thwarted, I suggest that S&P will point to all the other credible voices of the economists and politicians, 'very serious people,' who said either absolutely nothing, or voiced similarly misplaced opinions and 'mistakes in judgement' about the true nature of the unfolding financial frauds. How can you blame us, when no one of consequence said anything differently, forcefully.
So rather than key actors in a massive control fraud, they will portray themselves as hapless victims of the same mass delusion that affected most of the New York-London-Washington establishment, with many top universities in their supporting cast.
Will Alan Greenspan offer to be an expert witness on the perils of mistakes made while blinded by a sincerely held ideological delusion? Poor fellow, just a good chap making an honest error in judgement. He used a bad model. Who can blame him.The defense will be 'the credibility trap' itself. You cannot convict us, without indicting yourself.
And if they are as I think they are, the S&P team will bring some credible implications of their case for the sacrosanct TBTF crowd to the plea bargaining process, and make its objective the best terms in a settlement while admitting no wrongdoing. We chose to settle because it was cheaper. We are victims of big government. The usual suspects will run with that.
It is a corollary to the credibility trap that no one who knows 'where the bodies are buried' will be personally inconvenienced beyond mere appearances.
It will be interesting to see how this plays out. It might set the tone for the 'investigations' of the coming collapse and scandal in the paper silver market. How could we have done anything wrong when the CFTC investigated us for five years, and sat next to our people almost every day?
and.......
http://www.zerohedge.com/news/2013-02-05/eric-holder-holds-one-half-us-rating-agencies-accountable-financial-crisis
Eric Holder Holds One Half Of US Rating Agencies Accountable For Financial Crisis
We urge readers to do a word search for "Moody's" in the official department of justice release below. Here are the highlights:
- DOJ COMPLAINT ALLEGES S&P LIED ABOUT ITS OBJECTIVITY - when it downgraded the US?
- HOLDER SAYS S&P'S ACTIONS CAUSED `BILLIONS' IN LOSSES - did Moody's actions, profiled previously here, which happens to be a major holding of one Warren Buffett, cause billions in profits?
- HOLDER SAYS `NO CONNECTION' BETWEEN S&P SUIT, U.S. DOWNGRADE- just brilliant
Pure pathetic political posturing, because it was the rating agencies, whose complicity and conflicts of interest everyone knew about, who were responsible for the financial crisis. Not Alan Greenspan, not Ben Bernanke, and certainly not Wall Street which made tens of billions in profits selling CDOs to idiots in Europe and Asia. Of course, the US consumer who had a gun held against their head when they were buying McMansions with no money down and no future cash flow is not even mentioned.
Full release from the US Depratment of Promoting Injustice for kleptocrat bankers
Department of Justice Sues Standard & Poor’s for Fraud in Rating Mortgage-backed Securities in the Years Leading up to the Financial Crisis
Complaint Alleges that S&P Lied About its Objectivity and Independence And Issued Inflated Ratings for Certain Structured Debt Securities.
Complaint Alleges that S&P Lied About its Objectivity and Independence And Issued Inflated Ratings for Certain Structured Debt Securities.
Attorney General Eric Holder announced today that the Department of Justice has filed a civil lawsuit against the credit rating agency Standard & Poor’s Ratings Services alleging that S&P engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The lawsuit alleges that investors, many of them federally insured financial institutions, lost billions of dollars on CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. The complaint also alleges that S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors.
“Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis,” said Attorney General Holder. “Today’s action is an important step forward in our ongoing efforts to investigate – and – punish the conduct that is believed to have contributed to the worst economic crisis in recent history. It is just the latest example of the critical work that the President’s Financial Fraud Enforcement Task Force is making possible.”
Attorney General Eric Holder was joined in announcing the filing of the civil complaint by Acting Associate Attorney General Tony West, Principal Deputy Assistant Attorney General for the Civil Division Stuart F. Delery, and U.S. Attorney for the Central District of California André Birotte Jr. Also joining the Department of Justice in making this announcement were the attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa and Mississippi, who have filed or will file civil fraud lawsuits against S&P alleging similar misconduct in the rating of structured financial products. Additional state attorneys general are expected to make similar filings today.
“Many investors, financial analysts and the general public expected S&P to be a fair and impartial umpire in issuing credit ratings, but the evidence we have uncovered tells a different story,” said Acting Associate Attorney General West. “Our investigation revealed that, despite their representations to the contrary, S&P’s concerns about market share, revenues and profits drove them to issue inflated ratings, thereby misleading the public and defrauding investors. In so doing, we believe that S&P played an important role in helping to bring our economy to the brink of collapse.”
Today’s action was filed in the Central District of California, home to the now defunct Western Federal Corporate Credit Union (WesCorp), which was the largest corporate credit union in the country. Following the 2008 financial crisis, WesCorp collapsed after suffering massive losses on RMBS and CDOs rated by S&P.
“Significant harm was caused by S&P’s alleged conduct in the Central District of California,” said U.S. Attorney for the Central District of California Birotte. “Across the seven counties in my district, we had huge numbers of homeowners who took out subprime mortgage loans, many of which were made by some of the country’s most aggressive lenders only because they later could be securitized into debt instruments that were given flawed ‘AAA’ ratings by S&P. This led to an untold number of foreclosures in my district. In addition, institutional investors located in my district, such as WesCorp, suffered massive losses after putting billions of dollars into RMBS and CDOs that received flawed and inflated ratings from S&P.”
The complaint, which names McGraw-Hill Companies, Inc. and its subsidiary, Standard & Poor’s Financial Services LLC (collectively S&P) as defendants, seeks civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on three forms of alleged fraud by S&P: (1) mail fraud affecting federally insured financial institutions in violation of 18 U.S.C. § 1341; (2) wire fraud affecting federally insured financial institutions in violation of 18 U.S.C. § 1343; and (3) financial institution fraud in violation of 18 U.S.C. § 1344. FIRREA authorizes the Attorney General to seek civil penalties up to the amount of the losses suffered as a result of the alleged violations. To date, the government has identified more than $5 billion in losses suffered by federally insured financial institutions in connection with the failure of CDOs rated by S&P from March to October 2007.
“The fraud underpinning the crisis took many different forms, and for that reason, so must our response,” said Stuart F. Delery, Principal Deputy Assistant Attorney General for the Department’s Civil Division. “As today’s filing demonstrates, the Department of Justice is committed to using every available legal tool to bring to justice those responsible for the financial crisis.”
According to the complaint, S&P publicly represented that its ratings of RMBS and CDOs were objective, independent and uninfluenced by the potential conflict of interest posed by S&P being selected to rate securities by the investment banks that sold those securities. Contrary to these representations, from 2004 to 2007, the government alleges, S&P was so concerned with the possibility of losing market share and profits that it limited, adjusted and delayed updates to the ratings criteria and analytical models it used to assess the credit risks posed by RMBS and CDOs. According to the complaint, S&P weakened those criteria and models from what S&P’s own analysts believed was necessary to make them more accurate. The complaint also alleges that, from at least March to October 2007, and because of this same desire to increase market share and profits, S&P issued inflated ratings on hundreds of billions of dollars’ worth of CDOs. At the time, according to the allegations in the complaint, S&P knew that the quality of non-prime RMBS was severely impaired, and that the ratings on those mortgage bonds would not hold. The government alleges that S&P failed to account for this impairment in the CDO ratings it was assigning on a daily basis. As a result, nearly every CDO rated by S&P during this time period failed, causing investors to lose billions of dollars.
The underlying federal investigation, code-named “Alchemy,” that led to the filing of this complaint was initiated in November 2009 in connection with the President’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants. For more information on the task force, please visit www.StopFraud.gov .
Due to public interest in this case, the Department of Justice is releasing documents that may not be in an accessible format. If you have a disability and the format of any material on the site interferes with your ability to access some information, please email the Department of Justice webmaster at webmaster@usdoj.gov or contact Adora Andy at 202.514.2007. To enable us to respond in a manner that will be of most help to you, please indicate the nature of the accessibility problem, your preferred format (electronic format (ASCII, etc.), standard print, large print, etc.), the web address of the requested material, and your full contact information so we can reach you if questions arise while fulfilling your request.
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