RALEIGH – Standard and Poor’s will pay $21.5 million to North Carolina to resolve the Attorney General’s state lawsuit claiming the company inflated ratings for risky securities and misrepresented its objectivity before the 2008 financial crisis, Attorney General Roy Cooper said Tuesday.
“Good ratings led investors to make bad bets on risky securities, contributing to job losses and foreclosures that hit taxpayers and businesses in North Carolina hard,” Cooper said in a statement. “We took action to make the wrongdoers pay and prevent this from happening again.”
The S&P case is the second largest settlement resulting from Cooper’s efforts hold company’s responsible for practices that contributed to the financial crisis in North Carolina. In 2012, the Attorney General’s office brought in more than $300 million in a national mortgage settlement that went to prosecutors, financial crimes investigators, lending counselors and homeowners. Those funds were used to established the AG’s Financial Fraud Unit, which pursued the S&P case.
The statement released by Cooper’s office said North Carolina’s share of the S&P settlement will benefit schools, with more than $2.1 million in fines going to the state Civil Penalty and Forfeiture Fund. The rest should go to address the state’s critical needs, Cooper said. He will recommend that the money be used to save the NC Teaching Fellows program, which gives college scholarships to high achieving education students who stay to teach in North Carolina schools, and to retain scientists at the NC State Crime Lab, which is losing expert analysts to higher paid jobs elsewhere.
The S&P payment to North Carolina is part of a $1.375 billion national settlement that S&P will pay to the U.S. government, 19 states and the District of Columbia, the US Department of Justice announced Tuesday.
Cooper filed suit against the credit rating agency in state court 2013, as did the U.S. Department of Justice in federal court, seeking to hold S&P accountable for misrepresenting the objectivity of its ratings for securities backed by subprime mortgages. With Tuesday’s agreement, Cooper’s Consumer Protection Division lawyers will file the settlement to resolve the case, which was pending in the N.C. Business Court.
“This deceit cost North Carolina jobs and income,” Cooper said. “That hurt taxpayers, and this settlement is a step toward righting the wrong and preventing future harm.”
The complaints alleged that S&P’s analyses of financial products were influenced by fees paid by its investment bank clients, leading the company to wrongly inflate credit ratings for high-risk assets packaged and sold by Wall Street banks, according to the release. Investors, governments and other borrowers rely on ratings companies to provide independent and objective ratings in order to help them make financial decisions.
Structured finance securities backed by subprime mortgages were at the center of the national financial crisis. These financial products, including residential mortgage-backed securities and collateral debt obligations, derive their value from the monthly payments consumers make on their mortgages.
S&P’s alleged misconduct began as early as 2001, became particularly acute between 2004 and 2007, and continued until as recently as 2011, according to the release.
In addition to the financial settlement announced Tuesday, S&P has agreed to acknowledge its conduct related to the analysis of structured finance securities and to comply with applicable state laws. For a period of five years, S&P also agreed to cooperate with any state’s request for information related to a possible violation of state law.
North Carolina and the other participating states retain the authority to bring additional enforcement action if S&P engages in similar conduct in the future.
Changes adopted by the U.S. Securities and Exchange Commission in August 2014 should also help prevent future instances of inflated securities ratings, Cooper said. The SEC adopted new requirements for credit rating agencies that address conflicts of interest and new procedures to protect the integrity and transparency of rating methodologies. These include certifications that will accompany credit ratings attesting that the ratings were not influenced by other business activities.
States participating along with North Carolina include Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Maine, Mississippi, Missouri, New Jersey, Pennsylvania, South Carolina, Tennessee and Washington as well as the District of Columbia.