SEC & AGs Fine & Suspended S&P for MBS Rating Violations
The SEC and the Attorneys General of New York and Massachusetts this week fined Standard & Poor's almost $77 million, suspended S&P from conduit-fusion CMBS ratings work for a year and imposed other undertakings, for violations from 2010-2014. The SEC announced three settled administrative proceedings against the firm. The first settled charges that during 2010-2011 S&P changed the way it analyzed debt-service coverage ratios in a way that lessened credit-enhancement requirements in conduit-fusion commercial mortgage-backed securities (CMBS) issues. The SEC also found S&P ignored red flags in connection with the ratings-method change. The SEC imposed a $35 million civil penalty, $7 million in disgorgement (including interest), and imposed a one-year suspension from any CF-CMBS ratings activities, along with other remedial undertakings. S&P admitted certain facts in this first settled-action. In the Matter of Standard & Poor's Ratings Services, Rel. No. 34-74104 (Jan. 21, 2015). In the second action, S&P agreed to a $15 million penalty for misrepresentations and omissions in a "Great Depression article" that described ratings criteria for CF-CMBS as able to withstand Great-Depression era stressors, but without disclosing underlying assumptions and analytical flaws. The article's author had written a "smoking-gun" email to a colleague bemoaning the fate of his work as a "sales pitch" and fearing he would find himself "sitting in front of DOJ or the SEC…." In the Matter of Standard & Poor's Ratings Services, Rel. No. 34-74102 (Jan. 21, 2015). In the third, the SEC issued a cease-and-desist order for S&P's failure to apply established methodology to RMBS surveillance from October 2012 through January 2014. In the Matter of Standard & Poor's Ratings Services, Rel. No. 34-74103 (Jan. 21, 2015). The SEC also issued an order instituting enforcement proceedings against S&P's former CMBS head, Barbara Duka, alleging she lead the implementation of more issuer-friendly ratings criteria without ensuring adequate disclosure. In the Matter of Barbara Duka, Rel. No. 34-74105 (Jan. 21, 2015). The SEC announcement is here. In connection with the SEC's actions, S&P reached settlements with the NY Attorney General for $12 million and the Massachusetts Attorney General for $7 million. See A.G. Schneiderman Settles With Standard And Poor's Over CMBS Credit Ratings and Standard and Poor's to Pay $7 Million to Massachusetts for Making False Statement Regarding Its Ratings Methodology. Thomas K. Potter, III ( is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile here. © 2015 by Thomas K. Potter, III (all rights reserved).
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