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Standard & Poor's Settles In SEC Ratings Fraud Case

ROBERT SIEGEL, HOST:

The ratings agency Standard & Poor's agreed today to pay nearly $80 million to settle charges tied to mortgage-backed securities. The Securities and Exchange Commission and the states of New York and Massachusetts said S&P misled investors. It and other major ratings companies were widely accused of fueling the mortgage mania that led to the 2008 financial crisis. NPR's James Zarroli reports on why this settlement is an important milestone.

JIM ZARROLI, BYLINE: Companies like Standard & Poor's are paid by the very companies whose assets they rate - something critics say is a built-in conflict of interest. It means they have a financial incentive to downplay any problems they may find. And that's exactly what the SEC has accused them of doing. SEC enforcement director Andrew Ceresney says the firm loosened the criteria it used to rate certain commercial mortgage-backed securities without telling investors they were doing so.

ANDREW CERESNEY: They lied to investors about the criteria they were using to rate CMBS offerings, and investors were misled. This was egregious behavior with significant consequences.

ZARROLI: The SEC also filed charges against Barbara Duka, an S&P official involved in the ratings. She has denied any wrongdoing. S&P is one of three major ratings companies along with Moody's and Fitch. The rating services came under fire after the 2008 financial crisis accused of contributing to the subprime mortgage bust. And there was widespread talk about the need for reform. But Ceresney noted in a conference call with reporters that the cases unveiled today actually occurred in 2011 and 2012.

CERESNEY: But while the financial crisis may be behind us, these cases are a reminder that race-to-the-bottom behavior - that is loosening the rating standards in pursuit of market share - persists.

ZARROLI: Like numerous other financial firms accused of misconduct, and S&P did not acknowledge any wrongdoing, but it did agree to pay a fine and it promised to stay out of the market for certain mortgage-backed securities for a year. Guy Cecala, publisher of Inside Mortgage Finance, says that isn't likely to hurt the company's bottom line all that much because companies such as S&P have a lot of different ways of making money.

GUY CECALA: You know, it's sort of like getting a speeding ticket or a drunk driving charge and you say you're not going to drive for six months or whatever else it is. It has some impact, but it's certainly not a huge financial loss for S&P.

ZARROLI: Still, Cecala says, the charges announced today represent a milestone of sorts because it's the first time the federal government has managed to bring an enforcement action against a major ratings company. And he says it's unlikely to be the last. The Justice Department and several states have filed a $5 billion lawsuit against Standard & Poor's, accusing it of downplaying risks in the years leading up to the financial crisis. The company is said to be in talks to settle that suit. Guy Cecala says that's likely to be just the start of the company's legal troubles.

CECALA: This really looks like the tip of the iceberg. It's certainly going to be part and parcel of a larger settlement with S&P, and I think it's going to open the door to go in after the other ratings services.

ZARROLI: Federal officials declined to comment today on any other investigations now taking place. But Ceresney did say, "this is an area in which I imagine there will be future activity." Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.