

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.

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:



“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 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:



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.

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  1. Pat

    MBS litigation is a blame game. The credit ratings agencies want to blame the banks (for giving them bad info) or nobody at all (unforeseen systemic failure). The banks want to blame somebody, anybody, such as the credit ratings agencies. The Feds want to blame somebody just to get a conviction under their belts, even if it is not the real perpetrators (i.e. the banks).
    So if the Feds convict S&P, that will make it look like they are doing something and relieve them of responsibility for not going after the banks.
    The problem with this prosecution is that it will make the rating agencies the fall guys for the banks. S&P could easily go bankrupt, but then resurface as a new entity, just as Arthur Anderson was blamed for Enron, went bankrupt (more or less) and then returned to the scene as Accenture (?). Problem solved – Arthur Anderson were the “bad guys”, they got punished, now it’s back to business for everybody else. Arthur Anderson shareholders get wiped out, but AA execs get new jobs.
    The only way the banks can get dragged down is if the credit agencies cross-complain against the banks, which I figure they will not do for a variety of reasons (mainly because the banks are too big and too powerful).

    Incidentally, there might be a back-door route against the credit ratings agencies. The defrauded securities buyers could sue both the credit ratings agencies and the banks in a civil suit, not a criminal suit, and then stand in the shoes of the banks against the ratings agencies, for beach of contract and professional negligence. Again, I doubt this will happen.

    The System is always thinking ahead of the government and will not let anyone or anything get in their way. Why should it be any different this time around? They throw the credit rating agencies under the bus, and the caravan moves relentlessly onwards.

    1. James Cole

      Wow Pat, your facts are completely wrong about Arthur Andersen/Accenture. Accenture was the consulting arm of accounting firm Arthur Andersen that spun off from it in 1987 and changed its name to Accenture in 2000. The Arthur Andersen that you refer to gave up its CPA license in 2002 and never recovered.
      Aside from that the rest of your post is a mishmash of made-up legal theories. How exactly could the defrauded investors “stand in the shoes of the banks against the ratings agencies”?

      One major obstacle to action against the rating agencies, by the way, has been that those best positioned to sue the rating agencies are the monolines, but they never will, because they themselves rely on the rating agencies to survive, since their business model is essentially to rent out their ratings. Can you hear me, Assured Guaranty?

      There is an old common-law equitable action called “detrimental reliance” (a form of “promissory estoppel”) that perfectly applies to the rating agencies. If someone promises you that they will do something, and you reasonably rely on that promise, and the person fails to perform, and harm to you results, whether or not you’ve paid them to perform under that promise, you can compel performance. As a technical matter, damages were not available under actions of this type, but in these cases since it is too late to compel performance, the disgorgement of profits would seem like a fair equitable remedy.

        1. Susan the other

          I dunno if I can be hopeful, but I’m perfectly willing to allocate tax money to the DoJ to go after them all. They shouldn’t let Bear Stearns discourage them – god, just imagine how demoralized they could get in a slightly tougher world. Backing off like that is a luxury they should not have indulged in. And this article makes me wonder about whether S&P had the capacity to audit the banksters’ software. As you (Lambert) have shown, software code is literally becoming legal code ’cause nobody tackles it head on. So exactly what are the rating agencies’ capabilities to analyze this hidden stuff? For them to say they are the equivalent of “journalists” and they are merely voicing their “opinions” really doesn’t fly. I like that the DoJ is going after mail fraud, wire fraud and financial institutions fraud – sounds like a methodical foundation for RICO to me.

          1. sierra7


            “….sounds like a methodical foundation for RICO to me.”

            Absolutely, Bingo, Slam Dunk….”right on target”…….etc., etc………

            (My first thoughts before even finishing the article!!!!

          2. Maximilien

            Sto: “For them to say they are the equivalent of “journalists” and they are merely voicing their “opinions” really doesn’t fly.”

            Of course not. And a competent lawyer should be able to make quick work of that canard. A simple analysis of the company’s initial ratings of debt offerings compared to later ratings of the same offerings would probably show a pattern of nothing but no changes or downgrades. Scarcely, if ever, an upgrade. (In fact, I have never heard of a ratings agency upgrading an existing debt issue.)

            When debt that has been rated is NEVER upgraded, one can be sure that the the ratings applied to it at issuance have been consistently too high and therefore not reflective of a mere “opinion”. But rather, evidence of systematic promotion of the debt and deception about its quality.

    2. MN farmer

      If this does in fact o forward itwill soon become a matter of politics. Once there, the “blame” factor that you omit will come into full play. That being the immensely popular and widely exploited view that everything about this matter is to be placed at the feet of those inferior souls who took out loans. Or, better, who tricked the rightious into granting them those loans

      Count on it.

      1. Mark P.

        It will be tried and many will believe it. But the majority know the score.

        That said, a lot of the attitude at the top is very much “Sure, you’re mad. What are you going to do about it?”

        And they’re right.

  2. Conscience of a Conservative

    When you look at the behavior of s&p and Moody’s it becomes abundantly clear that the managers of both engaged in Control Fraud, delaying releases to models , promoting those who engaged in nefarious behavior and sidelining those who questioned ratings practices. Bonus and comp structure supported the schemes. I can’t take any suit seriously that treats it as a civil one and most importantly fails to hold individuals accountable.

  3. Richard Kline

    It’s not as though everyone in the Federal government has a common agenda, let alone acts in unity. But to me, there’s less to these filings than meets the eye. The fulcrum for interpretation to me is ‘who benefits?’ from these filings: Large investors. This isn’t suit ‘for justice,’ or ‘to establish the truth.’ To me, several Very Rich People/Corps lost much moolah on these crap CDOs, and they are looking to shake someone down for restitution. That is why, I suspect, these are civil filings, not criminal proceedings. It’s ‘the settlement’ which matters. And if it can be established in a court of law that the CDOs were inherently unsound, that can give a basis for the on-sellers of these CDOs to get out from under their own liability, and the end-acquirers perhaps to shake down some third party also.

    These suits seem to me one set of Very Rich Corps using the Guvmint to shake down another set of Sorta Rich Corps. It’s all about shifting liability. Maybe someone inside Justice actually cares, but it’s hard to see an action of this kind being intiated from a ‘caring position’ as opposed to a ‘servant of the rich’ position.

    I agree with Conscience above that if it’s not a criminal filing, the Guvmint is just carrying water for the Oligarchy.

    1. ScottS

      Doesn’t mean it can’t be a net positive for the rest of us. The rich use “divide and conquer” all the time on us. It’s fun to watch the other half eat their own medicine. It was one of the exceedingly few pleasures of the election last November (read: year) — richie riches pissing away their hard-stolen money on their man, not realizing that it couldn’t matter less whether Obamney or Robama won.

      Redistribution at ballot-point.

      1. Nathanael

        The problem is that most of the campaign contributions recycled to the owners of TV stations and ad agencies.

        Actually, there’s an interesting idea: back candidates if and only if they use their campaign contributions to pay large numbers of low-level staff — because those candidates are *living* redistributionary policy. :-)

    2. Gaylord


  4. Capo Regime

    Its the safe thing for Justice Department to do. They have never pursued any big fish and will not. S&P is safe as it provides the perception among the unwashed that DoJ is going after a major player but yet not taking an risks offending the well heeled bankster friends of the administrations. Reality of it is, going after a ratings agency is going after a bit player. Well known brand but hey nobody at Justice or SEC dreams of working at Moody’s or S&P.

  5. Jim A

    Isn’t there a lot of fine print on their ratings? I mean, they’re not insurance or gauranteers of the bonds. Just like psychics and palm-readers, don’t they tell you in the fine print that the ratings are basically, “for entertainment purposes only,” even while they’re touting how good they are at rating bonds?

  6. diptherio


    Uh…well, if you’re guilty then you should be exposed to liability. That’s kinda the point of having laws.

  7. docG

    Looks like sour grapes to me. With more than a dash of conflict of interest. S & P downgraded our Treasuries, no? And is threatening more of the same.

    1. rotter


    2. rotter


  8. Jesse

    I will take this more seriously if it includes criminal charges against individuals.

    But I like Yves’ take on this.

  9. Alex

    I’ll be more inclined to be proselytized if it showed a credible ladder up the food chain. This is political theatrics, PR mitigation of the Lenny Breuer mini saga, another red-herring designed to create a public perception that “finally somebody is doing something”.

  10. Rich R

    I thought the ratings agencies always fell back on the First Amendment claims for their defense…”Hey, we’re just expressing an opionion…we didn’t tell you to buy the damn things”. As, if the their opinions carried no greater weight than the old timers at the coffee shop.

    1. MLS

      …and the only reason S&P and Moody’s (and a handful of others that don’t matter much compared to these two behemoths) opinions count more is because the SEC said so.

    1. FrankB

      This does have a certain “punch back twice as hard” feel to it. Chicago politics gone national.

  11. Enraged

    Probably off topic but… why are world governments and treasuries listed as corporations on EDGAR? And if, indeed, governments are corporations, how can we possibly expect anyone to be personally held liable for anything? Aren’t people in charge and responsible for the greatest financial scandal ever visited upon humankind mere employees acting within the scope of their employment?

    And as much as no one appears to be interested in even mentioning it, is there any validity to The One People’s Public Trust claims of bankruptcy of said corporations?

  12. William Neil

    Yves or anyone else who might know:

    What ever happened to the “trail,” not just of paper, but legal implications, to due diligence firm Clayton Holdings, which sat squarely between the Wall Street Banks and the ratings firms, and which, according to testimony, offered their due diligence findings to the ratings firms – an offer not taken?

    To be more specific, Clayton’s former head, and a current high officer (Keith Johnson and Vicki Beal, respectively) testified in front of the Financial Crisis Inquiry Commission hearing held Sept. 23, 2010 – a hearing held on the West Coast – and at a time of great national political turmoil leading to the Congressional surge of the Tea Party – so it didn’t get a lot of coverage. But when the Commission’s report came out in the early part of 2011, this line fraud inquiry seems to have gone cold…maybe Bill Black could fill us in on why it petered out…

    The Huffington Post did do a couple of follow-ups wihich strongly implied that Clayton Holdings was very uncomfortable with Johnson’s testimony. Just from the lay of the legal landscape you covered in today’s post, it’s hard not to imagine that Clayton Holdings is entirely out of the picture. They had perhaps the closest first hand look at the nature of the those mortgages…

  13. Peter MacDougall

    We can assume somebody at DoJ needed LB out of the way before firing the first sable round into the armored hide of the ratings agencies, their lobbyists and clients. In a decent world all of these companies would admit culpability, apologize profusely, ask forgiveness, pay fines and do their community service and move on circa 2010. Instead these companies perpetrate more fraud working in the same ways for the same clients while awaiting decisions which will take years if they are allowed to proceed at all. My expectation is that if the Whitehouse doesn’t kill this in a month, then the Supreme Court will in a preliminary decision by years end. Just watch.

  14. OpenThePodBayDoorHAL

    I guess what bothers me is that this took 6 years to surface. Has the landscape changed at all in those 6 years? What politics are different? What “optics” are different, if any? With a captured “too big to jail” DOJ, why would the banks need this as air cover now? S&P is not a big player themselves, they’re a cipher for other forces. Is it Warren B making a power play from Moody’s? Something doesn’t seem right about the timing of this.

    1. Anon Too

      What may have changed in the landscape? An election is over so there may be legacy worries…lack of any financial prosecution is the biggest knock on Obama. Tea party politics seem to be diminishing so there is a slim chance rational politics may raise its head. The Frontline show seemed to revive what many were hoping would just go away. Yves and others have done an amazing job in reporting and not letting the issue just go away. There are a few people in government who recognize the threat that our current financial system poses to the U.S.A and our actively working to avert a repeat of the inevitable if corrections are not made. So as far as timing a few things have subtly (and certainly slowly) shifted.

  15. Vikas

    Ok, I understand the theory of the case against S&P, but why nothing on Moody’s? Were their activities where this legal theory applies de minimis?

    I can understand why S&P balked- $1b and an admission of liability for $13m in fees?

  16. jfleni

    “the Feds have proven to be great draftsmen but lousy prosecutors”? Maybe or Maybe not. Talking to really expert law professors and judges might have been a prelude to this action. If it works, it could open the floodgates, and then the grief for the plutocrats could be profound and long-lasting, no matter what Barry or Timmy think. We’ll just have to wait and see.

  17. briansays

    i note per the la times that the Cali AG filed a suit against S&P today for losses to the states pension funds

  18. Scaramouche

    This S&P prosecution allows the DOJ the facade of law enforcement against Wall Street criminality. I believe that S&P was probably chosen because the revolving door being a government financial regulator and the employment at ratings agencies is rather small. I would be more impressed with the same stance taken with Goldman Sachs, Morgan Stanley, et al.

  19. Sleeper

    To be completely cynical –

    DOJ picked this to lose the case –

    Then the mantra will be that these cases are “unwinnable” and thus not worth prosecuting.

    The DOJ could be using the wire and mail fraud statutes to prosecute the banks – eg Linda Green. And they do not.

    This S&P case has more than meets the eye.

  20. Laughing_Fascist

    Would be interested to know when does the statute of limitations run on DOJ’s ability to bring similar suits against Moody’s and Fitch (who engaged in the exact same hallucinatory “everything is groovy” ratings leading up to the collapse).

    I think there is a real possibility here that this is payback by Obama. Don’t underestimate the fury that must have swept through the White House. The first downgrade in history on Obama’s watch – it was a historical event or at least must have seemed that way at the time. And poor innocent Obama had to endure the rants from the Rs: “Obama has single handedly destroyed the good credit of the United States.” “Inept.” “Failed leadership.” The administration even provided S & P with a clear opportunity to back down when it showed S & P that the anticipated future deficit over ten years would be “only” $20 trillion and not the $22t claimed by S & P. S & P said shove it and stuck to its downgrade.

    So now you are messing with the man’s legacy. And the global currency racket. I can just see Geithner and Axelrod redfaced. And Obama seething. And S&P said in its notice of downgrade that “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened …”

    Whoa. That could be indirectly referring to the prez.

    The thinking inside the WH would be along the lines of “The audacity, the arrogance of this shitbag ratings agency after we completely let them off the hook for the collapse; and they make their money only because the SEC gives them NRSRO status. Why the f*** are they not playing the game like Moody’s and Fitch. Is the CEO an imbecile?”

    So someone might think “Nah, the WH wouldn’t retaliate because it would be so obvious. ”

    Wrong. This gov/system has been publicly perpetrating grand larceny (in a grand style) and using the proceeds to get a seat at the WH table to make sure O (and therefore DOJ) stays on the same page. There is nothing to stop DOJ from doing (or not) whatever Obama wants it to do. And if its obvious that DOJ is smashing a ratings agency (or a whistle blower, etc) solely for political payback and as a warning, so what? The whole ongoing felony predation is obvious. The felons could run naked in central park and not get a ticket.

    The DOJ is an extremely aggressive organization. They pile on the charges as has been well noted here at NC. I don’t see a loss of mojo. I see reprehensible, aggressive behavior conditioned by orders from the top. But when it comes to Wall street for some strange reason (sarcasm) the DOJ turns into a potted plant.

    Except for this case against S&P.

    The final nail in the circumstantial case that foul play is at work in DOJ (i.e.that DOJ’s action against S&P is retaliation) is this: there is one other NRSRO subject to an enforcement action – by the SEC. Egan-Jones downgraded the US in 2011 before S&P’s downgrade. Egan then downgraded the US again on Apr 5 2012 to AA. On Apr 24 SEC filed its action against Sean Egan personally. And there is no claim of fraudulent ratings. The charges look like chickenshit compared to Moody’s and Fitch’s catastrophic ratings fraud.

    Holder is sort of like J Edgar. “There is no such thing as (organized) financial crime. Gotta watch those protesters.”

    1. different clue




      1. different clue



        1. Laughing_Fascist






  21. DolleyMadison

    Maybe this is retribution for the agencies downgrading the US credit rating over the debt ceiling? Just a thought…And AGAIN the focus is on the investors who were wronged, not the homeowners.

  22. Jerry

    Wow… If only Arthur Andersen had thought to use the 1st amendment defense regarding their opinions. Or tried claiming that the securities and exchange acts of 1933 and 1934 gave them significant protections.

    There might still be an arthur Andersen today. (not that that would be a good thing).

    Why should the ratings agencies get better legal protections than auditors? In many ways they provide the same sort of service – providing assurance to the investing public. Auditors and ratings agencies have also proven their opinions aren’t worth the paper they’re printed on.

    Of course, there’s always the unintended consequence – take down S&P and the remaining ratings agencies might become like the audit ‘big 4’ – essentially immune from prosecution related to any significant legal problems

  23. steve


  24. Tim8888



    They were not a boiler room scam driving this…


    I wish I could do that on my investments!


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