Indiana joins $1.375 billion settlement with Standard & Poor’s

AG Zoeller, Sec. Lawson: S&P misled investors; State to receive $21.5M

INDIANAPOLIS – Indiana Attorney General Greg Zoeller and Secretary of State Connie Lawson announced today that Indiana, the U.S. Department of Justice, 18 other states and the District of Columbia reached a settlement agreement with Standard & Poor’s Financial Services LLC (S&P) resolving allegations that S&P misled investors when it rated structured finance securities in the lead-up to the 2008 financial crisis.

The settlement requires S&P to pay $1.375 billion, which will be split among the states and the Department of Justice. Indiana will receive $21.5 million in the settlement, a majority of which will go toward the state General Fund.

The state and federal complaints against S&P alleged that – despite S&P’s repeated statements emphasizing its independence and objectivity – the credit rating agency allowed its analysis to be influenced and shaped by its desire to earn lucrative fees from its investment bank clients. Moreover, the lawsuits alleged S&P knowingly inflated the credit ratings of toxic assets packaged and sold by the Wall Street investment banks. The alleged misconduct which misled investors began as early as 2001 and became particularly egregious between 2004 and 2007.

Structured finance securities backed by subprime mortgages were at the center of the 2008 financial crisis. These financial products, including residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages. Instruments backed by subprime mortgages – where borrowers by definition are more likely to default – are riskier investments, which S&P’s rating analysis downplayed, leading investors to investment decisions based on faulty assumptions.

“As alleged in our lawsuit, Standard & Poor’s misled investors who believed they were getting objective analysis, which contributed to the worst financial crisis we’ve experienced in decades,” Zoeller said. “This company’s misleading of the investing public created hardship for many, and today’s settlement sends a message that these deceptive practices will not be tolerated.”

In June of 2013, the Indiana Attorney General’s Office filed a lawsuit against S&P on behalf of Secretary of State Connie Lawson’s office, which oversees the securities industry in Indiana. Indiana’s complaint alleged that S&P violated the Indiana Uniform Securities Act by misrepresenting the objectivity and independence of its rating process with respect to certain structured finance securities. The complaint did not challenge S&P’s ratings of Indiana’s state and municipal securities.

“I’m pleased that S&P was held accountable for its actions through the enforcement of Indiana’s securities law,” Secretary Lawson said. “Investors deserve accurate and objective ratings when investing and many Hoosiers look to S&P as a trusted and reliable source. We cannot have companies defrauding the marketplace.”

In addition to the financial settlement, S&P has agreed to a statement of facts acknowledging conduct related to its analysis of structured finance securities. S&P also agrees in the settlement to comply with all applicable state laws, and for five years it will cooperate with any request for information from any state expressing concern over a possible violation of state law. Further, the states retain authority to enforce their laws – the same laws used to bring these cases – if S&P engages in similar conduct in the future. The states and federal government have agreed to file stipulated judgments, consent judgments or similar pleadings in their lawsuits in order to implement the terms of the settlement agreement and resolve their respective court proceedings.

Zoeller thanked Indiana’s state and federal partners for the cooperation and coordination that led to today’s settlement announcement.

The other states that are participating in today’s settlement include:  Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Idaho, Illinois, Iowa, Maine, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee and Washington as well as the District of Columbia.