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S&P Sent to Time-Out, Ordered to Pay More Than $77 Million

January 22, 2015

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Wednesday morning, the SEC announced it has fined and imposed a one-year suspension against Standard & Poor’s Ratings Services for its fraudulent misconduct in the ratings of certain commercial mortgage-backed securities (“CMBS”). To settle three SEC administrative proceedings, S&P agreed to pay over $58 million in disgorgement, interest, and penalties. S&P will pay an additional $19 million to settle related cases brought by the New York Attorney General’s office and the Massachusetts Attorney General’s office. View the SEC’s announcement here, the New York Attorney General’s announcement here, and the Massachusetts Attorney General’s announcement here.

The SEC’s first order addressed S&P’s practices in its conduit fusion CMBS ratings methodology.  S&P admitted that its public disclosures affirmatively misrepresented the methodology it used in 2011 to rate six conduit fusion CMBS transactions and to issue preliminary ratings on two more transactions.  As part of this settlement, S&P agreed to a one-year suspension from rating conduit fusion CMBS. It further agreed to pay disgorgement of $6.2 million, prejudgment interest of $800,000, and a civil money penalty of $35 million to the SEC.

The second SEC order found that after being frozen out of the market for rating conduit fusion CMBS in 2011, S&P sought to re-enter that market with an overhauled ratings criteria. To illustrate its new criteria’s relative conservatism, S&P published an article purporting to show that the new credit enhancement levels could withstand Depression-era levels of economic stress. S&P’s research, however, relied on flawed and inappropriate assumptions.  Without admitting or denying these allegations, S&P agreed to settle this action by, among other things, paying a $15 million civil penalty.

The third order addressed S&P’s self-reported internal control failures which occurred in October 2012 to June 2014. During that time, S&P changed an important assumption which made its ratings less conservative and inconsistent with its publicized assumptions. When it made those changes, S&P did not follow its internal policies, using instead ad hoc workarounds that were not fully disclosed to investors. Without admitting or denying these findings, S&P agreed to extensive undertakings.

Finally, in a contested order the SEC’s Enforcement Division instituted administrative proceedings alleging that Barbara Duka, the former head of S&P’s CMBS Group, fraudulently misrepresented the manner in which the firm calculated conduit fusion CMBS ratings in 2011. This matter will be scheduled for a public hearing before an administrative law judge.

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