Standard & Poor's is close to a settlement of about $1 billion with the U.S. for allegedly misleading investors about its ratings of mortgage-backed securities before the subprime crisis, a person familiar with the matter said.
The McGraw Hill Financial Inc. unit and the Justice Department may agree to settle the case as early as this quarter, according to the person, who asked not to be identified because the negotiations are confidential.
The Justice Department has secured settlements worth tens of billions of dollars during the past two years from mortgage lenders and banks it blamed for the 2008 financial crisis. Those companies generated unprecedented amounts of shoddy mortgages that were packaged and sold to investors as securities, many of which turned out to be worthless despite their investment-grade ratings.
New York-based S&P, the only credit rater sued by the Justice Department's residential mortgage-backed securities working group, has alleged it was singled out because of its downgrade of U.S. debt in 2011, while its competitors, which issued the same grades for the same securities, weren't sued by the U.S. The case is tentatively scheduled for trial in September.
Catherine Mathis, a spokeswoman for S&P, didn't immediately respond to phone and email messages yesterday after regular business hours seeking comment on negotiations. Emily Pierce, a Justice Department spokeswoman, declined to comment on them.
The U.S. accused the company of lying about its ratings' being free of conflicts of interest. The government has said it might seek as much as $5 billion in civil penalties for losses by federally insured financial institutions that relied on the company’s investment-grade ratings for mortgage-backed securities and collateralized-debt obligations.
U.S. District Judge David Carter in Santa Ana, Calif., ruled last year that S&P would be allowed to seek information from former U.S. Treasury Secretary Timothy Geithner about what the company said was a "threatening" call he made to Harold W. McGraw III days after S&P's downgrade of the U.S.
The judge said at the time that he was concerned the call to McGraw Hill Financial's chairman was intended to have a "chilling effect." Carter also said that, even if S&P was allowed to seek potential evidence from Geithner, that didn't mean that any such evidence would be presented before a jury if the case goes to trial.
The Justice Department has denied there was any connection between the downgrade and the lawsuit two years later. The investigation of S&P predated any alleged comments Geithner made to McGraw, a government official said.
The U.S. alleged in its Feb. 4, 2013, complaint that S&P knowingly downplayed the risk on securities before the credit crisis to win business from investment banks seeking the highest possible ratings to help them sell the instruments. S&P issued credit ratings on more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 to October 2007, according to the complaint.
