Media reports suggest that shares in McGraw-Hill – the parent company of Standard & Poor’s – nosedived by nearly 14 per cent as word of the impending law suit against the credit agency broke. Reuters news agency reported that the US Justice Department is preparing to file civil proceedings against S&P alleging illegal activity in the way it assessed mortgage bonds during the property boom of the mid-2000s.

Shadow

The development cast a wider shadow over the whole rating agency sector, with shares at S&P rivals Moody’s reported to have tumbled by nearly 11 per cent.
Reuters cites a New York Times report suggesting that Justice Department lawyers have decided to launch the action after talks between S&P and government officials broke down.
Legal commentators are also cited as highlighting the importance of the action being filed in the civil as opposed to criminal courts. They point out that the lower standard of proof could result in what the news agency describes as investigators being able more easily to discover  ‘smoking guns’ through subpoenas.

Future litigation

Professor Jeffrey Manns of Washington DC’s Georgetown University law school told Reuters: ‘The law suit is significant because it could augur future government action or, even worse for the agencies, more litigation by investors.’
The credit agency itself was already gearing up for a robust defence of the action even before court papers have been filed. The report quotes a statement from S&P saying: ‘A DoJ lawsuit would be entirely without factual or legal merit. The DoJ would be wrong in contending that S&P ratings were motivated by commercial considerations and not issued in good faith.’

Pay-back time

The action could be viewed as the opening shots in a battle seeing the US government fighting back at the credit agencies, who have been painted by many in Washington as the bêtes noire of recent years as they routinely threaten to reduce government ratings.
The AmLaw Daily web site named today the three law firms acting for S&P as: New York-based Cahill Gordon & Reindel, global practice Morrison & Foerster and San Francisco’s Keker & Van Nest.