LOS ANGELES Standard & Poor’s called on a federal court here yesterday to dismiss a $5 billion civil suit brought by the U.S. Justice Department claiming the Wall Street rating agency ignored its own standards rating risky investments sold to, among others, WesCorp FCU and Eastern Financial Florida CU, two of the biggest credit union failures ever.
S&P, referring to last month’s dismissal of similar charges brought by Space Coast CU, the successor to Eastern Financial, called the civil allegations in the Justice Department’s suit a “stretch” that were based on loosely connected charges with little specificity.
“Each of the representations identified by the Government is the type of vague, generalized statement that court after court—in this District, this Circuit and elsewhere across the country—has held to be non-actionable in a federal fraud case such as this,” argued the S&P lawyers, who said S&P ratings are not hard and fast but “predictions about how securities might perform in the future”.
“It claims fraud despite the fact that S&P acted in accordance with its well-established public practice of relying upon its own ratings, in which it believed, despite the fact that other rating agencies issued ratings identical to those of S&P on the same securities at issue, and despite the fact that its views were consistent with those of virtually every other market participant, including the financial institutions whose losses are cited in the Complaint, as well as officials at the highest level of the United States government,” wrote the S&P lawyers in their brief. “If the Government’s case appears to be a stretch, that is because it is. S&P’s inability, together with the Federal Reserve, Treasury and other market participants, to predict the extent of the most catastrophic meltdown since the Great Depression reveals a lack of prescience but not fraud.”
S&P pointed to last month’s ruling dismissing a suit by Space Coast CU, which acquired the remnants of Eastern Financial in 2009, because the $3.2 billion credit union failed to prove that the Wall Street banks or ratings agencies engaged in fraud when they marketed the CDOs to the one-time $2.4 billion Eastern Financial, the biggest non-corporate credit union failure ever.
In that case, the Judge rejected Space Coast’s claims that S&P adjusted its ratings on CDOs to make them more marketable for its Wall Street banking clients. But the Judge ruled there is no evidence that S&P engaged in fraud with respect to the specific CDOs bought by Eastern Financial. “Space Coast has failed to plead in detail how each Defendant defrauded Eastern through use of S&P’s ratings adjustments,” wrote the Judge.
CDOs, or collateralized debt obligations, are derivatives created from a pool of other derivatives—in these cases mortgage derivatives. WesCorp and Eastern Financial were the only credit unions authorized to invest in CDOs.
In this suit, the Justice Department alleges that from 2004 until 2007, S&P “adjusted and delayed” updates to its rating criteria and models, and ignored warnings from its own analysts about the weakening housing market to churn out triple A ratings the highest on mortgage-related securities, including CDOs.
The Justice Department also alleges that S&P falsely represented to investors, including WesCorp and Eastern Financial, Citibank and Bank of America, that its ratings were objective when instead they were influenced by a desire to win fees and market share.
A hearing in the case has been scheduled for May 20 in the U.S. District Court for the Central District of California.