Acting Attorney General John J. Hoffman announced today that Standard & Poor’s Financial Services LLP and its parent company, McGraw Hill Financial, Inc., will pay the State $21.5 million as part of a global settlement resolving allegations that it violated state and federal laws by misleading consumers about its structured finance securities rating practices.
Under the global settlement, Standard and Poor’s will pay New Jersey, 18 other states, the District of Columbia and the U.S. Department of Justice a total of $1.375 billion to resolve the lawsuits filed against it. The settlement resolves allegations that Standard & Poor’s harmed consumers by falsely claiming to be an independent source of analysis on complex investments known as structured finance securities, when in fact its ratings of the securities were driven by its own revenue goals, as well as favoritism toward investment banking clients who issued the securities and paid the company related fees. The market for analyzing and rating structured finance securities is lucrative. According to the State’s original lawsuit against Standard & Poor’s, filed in 2013, the company charges three or four times as much to analyze a structured finance security as it does to rate a corporate bond. In 2006, Standard & Poor’s revenues rose approximately 15 percent – to $12.7 billion – largely on the basis of increased fees it collected from structured finance security ratings.
Attorneys from the Division of Law filed New Jersey’s lawsuit against Standard & Poor’s in Superior Court in Essex County in October 2013. The lawsuit charged McGraw Hill and Standard & Poor’s with three counts of violating the New Jersey Consumer Fraud Act. In December 2014, Division of Law attorneys successfully opposed a motion by the Standard & Poor’s to dismiss the complaint.
The State’s lawsuit alleged that Standard & Poor’s had an “issuer-friendly” approach to securities analysis and rating that was rooted in a fear of losing market share to competitors. Such competitive concerns undermined the integrity of the company’s ratings methodology, the complaint alleged, and also caused Standard & Poor’s to be lax in monitoring the performance of structured finance securities it had already rated.
In addition to New Jersey, the U.S. Department of Justice, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Idaho, Illinois, Indiana, Iowa, Maine, Mississippi, Missouri, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington are parties to the settlement.