Government issues first-ever penalties on credit rater

The credit rater Standard & Poor’s will pay roughly $77 million in penalties and face a one-year ban on rating some mortgage securities after the government charged it engaged in fraudulent behavior.

The action marks the first time the government has ever penalized a credit rater, as the Securities and Exchange Commission claimed S&P misled investors on its rating criteria for a large chunk of the commercial bond market.

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“Investors rely on credit rating agencies like Standard & Poor’s to play it straight when rating complex securities,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “But Standard & Poor’s elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors.”

S&P admitted to some wrongdoing as part of the settlement, and will pay $58 million in penalties to the SEC. The rater will also pay $12 million to the state of New York and $7 million to Massachusetts to settle related probes.

In addition, S&P will be barred for one year from rating certain commercial mortgage-backed securities, which make up a sizable chunk of the commercial bond market. The rater said it was pleased to reach a settlement, and takes regulatory compliance "very seriously."

The settlement marks the first-ever penalties assessed against a credit rater, after the industry came under fierce criticism for providing lofty ratings to risky mortgage securities that proved worthless during the financial crisis.

In its latest charges, the SEC claims that S&P relied on a “false and misleading” article to sell its revamped rating criteria to investors, leading them to believe that its criteria could withstand economic damage not seen since the Great Depression.

In fact, the SEC claimed the article relied on data decades removed from that economic collapse, and the original author of the study complained about how his work had been modified.

The penalties also mark the latest in a rocky history between S&P and the U.S. government. The credit rater made history when it issued the first-ever downgrade of the nation’s credit rating following the pitched debt-limit fight of 2011, even as the government openly criticized its methods.

The Justice Department later filed a multibillion-dollar suit against the rater for its activity leading up to the financial crisis, which is reportedly nearing a separate settlement. That move led S&P to countersue the U.S. government, alleging it amounted to retribution for issuing the downgrade.

—This post updated at 10:08 a.m.