Harris says S&P’s actions caused California’s public pension funds and other investors to lose billions of dollars. The complaint alleges that the McGraw-Hill Companies Inc. and Standard and Poor’s Financial Services LLC violated the False Claims Act and other state laws by using a ratings process based on what senior executives described as “magic numbers” and “guesses.”
Specifically, the complaint alleges that, from 2004 to 2007, S&P systematically misrepresented to the public, and to the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS), that its ratings of structured finance securities were based on an independent, objective and reliable analysis, and not influenced by S&P’s economic interests. In doing so, S&P lowered its standards for rating securities to gain market share and increase profits and violated the False Claims Act by making false statements about the nature and risk of investments. The complaint also describes the company’s efforts to suppress the development of new and more accurate ratings models.
In mid-2007, the housing bubble burst. After securities that S&P had deemed the least risky began defaulting, S&P downgraded many residential mortgage backed securities investments. The market collapsed, and of those securities issued in 2007, more than 90% were downgraded to junk status. The two retirement systems lost approximately $1 billion.
Attorney General Harris joined the Department of Justice and 12 other states and the District of Columbia in announcing lawsuits against S&P. However, California’s suit includes a claim for triple damages, because when the state makes a purchase based on a false statement, the defendant is responsible for the amount lost times three.
The complaint can be downloaded from here, at the bottom of the page.