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The Week In Securities Litigation: DOJ Files Significant Market Crisis Case Against Rating Agency

The Department of Justice filed one of the most significant market crisis cases this week against a major rating agency as a defendant. The case centers on years of false statements about ratings given to RMBS and CDOs, according to the complaint, as the market crisis evolved and the market for those securities collapsed. At the same time the SEC announced that last Spring the court granted summary judgment against it and in favor of a defendant in one of its major market crisis cases. No appeal will be taken.

The PCAOB announced two new cooperative agreements this week. The D.C. Circuit handed down a decision which defines the circumstances under which reports prepared under Commission consent decrees become official records subject to a common law right of access.

Market crisis

Market crisis: U.S. v. McGraw-Hill Companies, Inc., Case No. CV 13-00779 (C.D. Cal. Filed Feb. 4, 2013). The complaint is based on Financial Institutions Reform, Recover, and Enforcement Act of 1989 or FIRREA and alleges wire fraud, mail fraud and financial institution fraud. It seeks to vindicate the interests of a number of federally insured institutions who purchased RMBS and CDOs based on the ratings issued by S&P from 2004 through 2007. The complaint details an on-going scheme to defraud purchasers of the securities by S&P involving a series of transactions over years. The scheme centered on repeated false representations by S&P that its credit ratings of RMBS and CDO traunches were objective, independent, uninfluenced by any conflicts. Throughout the period the firm failed to appropriately adjust its criteria and models as the market unraveled, made changes to its standards which were designed to achieve a certain result rather than reflect the markets, ignored the increasing risks of the market crisis and, in some cases, disregarded its own policies. The complaint demands civil money penalties in an unspecified amount and other relief.

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For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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