Washington: The Indian American Attorney General from California, Kamala Harris today filed a lawsuit against S&P for inflating its ratings of structured finance investments, which allegedly caused the state's public pension funds and other investors to lose billions of dollars.
Such an announcement by Harris came moments after the US Attorney General, Eric Holder, announced that the United Sates has sued the major credit rating agency on similar charges.
"For years, S&P placed its priority on maintaining its market share, instead of the investors who trusted in its supposedly objective ratings," said Harris.
"When the housing bubble burst, S&P's house of cards collapsed and California paid the price-in billions. S&P must be held accountable for its conduct that contributed to one of our country's worst financial crises," she added.
In her complaint Harris alleges that the McGraw-Hill Companies, and Standard and Poor's Financial Services violated the False Claims Act and other state laws by using a ratings process based on what senior executives described as "magic numbers" and "guesses.
"Investors relied on S&P and its competitors to rate these securities because they had access to only general descriptions of the assets backing their investments, which often included mortgages," Harris said.
California's public pension funds also relied on S&P because they are often required to buy securities that received a coveted "AAA" rating, signalling that the investment was top-tier and bore minimal risk, she added.
The complaint alleges that, from 2004 to 2007, S&P systematically misrepresented to the public, and to CalPERS and CalSTRS, that its ratings of structured finance securities were based on an independent, objective and reliable analysis, and not influenced by S&P's economic interests.
In doing so, S&P lowered its standards for rating securities to gain market share and increase profits, and violated the False Claims Act by making false statements about the nature and risk of investments.
The complaint also describes the company's efforts to suppress the development of new and more accurate ratings models.
Harris joined the US Department of Justice and 12 other states and the District of Columbia in announcing lawsuits in Washington, D.C.
The other lawsuits allege violations of the Federal Financial Institutions Reform, Recovery and Enforcement Act and state unfair competition laws.
However, California's suit is unique because it is being filed not only under California's unfair competition laws but also under the state's False Claims Act.
This suit includes a claim for triple damages - because when the state makes a purchase based on a false statement, the defendant is responsible for the amount lost times three.
First Published: Tuesday, February 5, 2013, 23:32