South Carolina is among the states settling lawsuits with Standard & Poor’s over government allegations that the firm inflated its ratings of toxic mortgage investments that helped trigger the last financial crisis.
In total, S&P said Tuesday it is paying about $1.38 billion to resolve the case.
Standard & Poor’s Financial Services, part of McGraw Hill Financial, reached a $687.5 million settlement with the U.S. Justice Department over ratings issued from 2004 through 2007. It will pay an equal amount to end lawsuits filed by the attorneys general of 19 states and the District of Columbia.
South Carolina’s share is about $21.5 million, said Mark Powell, spokesman for Attorney General Alan Wilson.
After a judge approves the settlement, and lawyer fees and legal costs have been paid, the balance will go to the state, Powell said.
McGraw said the settlement contains no findings of violations of law. All parties agreed to settle “to avoid the delay, uncertainty, inconvenience, and expense of further litigation,” according to a company statement. It also said the deal “is in the best interests of the company and its shareholders and is pleased to resolve these matters.”
Justice filed civil fraud charges against S&P two years ago this week, alleging the company failed to warn investors that the housing market was collapsing in 2006 because doing so would hurt its ratings business. The government sought more than $5 billion in damages.
Wilson brought his own case in state court in Richland County in February 2013 for “unfair and deceptive practices relating to ratings” that S&P issued. Wilson cited violations of the S.C. Unfair Trade Practices Act and the S.C. Uniform Securities Act.
That was shortly after S&P attorney Floyd Abrams filed a pre-emptive complaint in federal court naming the state of South Carolina as defendant.
Abrams is perhaps best-known for defending The New York Times in its efforts to publish the Pentagon Papers in 1972. In S&P’s case, he argued that credit ratings are protected under the First Amendment. Abrams also said South Carolina’s Unfair Trade Practices Act “impermissibly” punishes free speech because it doesn’t require proof that the firm knew its ratings were false when it issued them.
The First Amendment was irrelevant in this instance because it does not protect commercial speech that’s false or misleading, Wilson’s office said in October 2013.
The three big rating agencies — S&P, Moody’s Investors Service and Fitch Ratings — have been blamed for helping fuel the 2008 crisis by giving high ratings to high-risk mortgage securities. The ratings made it possible for banks to sell the securities, which totaled trillions of dollars. Some investors, such as pension funds, can only buy securities that carry high credit ratings.
Those investments soured when the housing market began to collapse in 2006.
Experts say the Justice lawsuit against S&P could be replicated if the government takes action against Fitch and Moody’s.
S&P disputed the allegations when the original federal lawsuit was filed. The firm said its ratings were based on a good-faith assessment of the performance of home mortgages during a time of market turmoil.
Many believe the fundamental conflict of interest at the heart of the rating agencies’ business remains intact: They continue to be paid by the companies that issue the securities they rate.
“This doesn’t fix anything,” said Janet Tavakoli, president of Tavakoli Structured Finance and a former investment banker. “This is just a traffic ticket.”
The Associated Press contributed to this report.