CHICAGO (AP) — The Illinois attorney general filed a lawsuit Wednesday accusing Standard & Poor's of misleading investors by assigning its highest ratings to risky mortgage-backed investments during the years leading up to the crash of the housing market.
The lawsuit from Lisa Madigan's office alleges the agency compromised its independence by issuing high ratings for unworthy or risky investments as part of a strategy to boost revenue and market share. The lawsuit cites internal emails and conversations, including an instant messenger exchange in April 2007 in which an employee tells another that an investment "could be structured by cows and we would rate it."
"Publically, S&P took every opportunity to proclaim their analyses and ratings as independent, objective and free from its desire for revenue," Madigan said. "Yet privately, S&P abandoned its principles and instead used every trick possible to give deals high ratings in order to retain clients and generate revenue."
Madigan's lawsuit singled out mortgage-backed securities, saying Standard & Poor's misrepresented the risks by giving the investments its highest rating of AAA.
A spokesman for Standard and Poor's rejected the claims.
"The case is without merit, and we will defend ourselves vigorously," said David Wargin.
A spokeswoman for Madigan, Robyn Ziegler, said the attorney general began investigating Standard & Poor's in early 2010. The probe is continuing, but Madigan determined that it had progressed enough to file the suit, Ziegler said. Madigan previously had been involved in discriminatory-lending lawsuits against Bank of America subsidiary Countrywide Financial Corp. and Wells Fargo.
The financial products singled out in the Standard & Poor's lawsuit involve the bundling of a pool of mortgages that are then sold as securities. They are backed by residential mortgages, including the subprime mortgages that have been blamed for much of the economic turmoil set off by the housing crash in 2007 and 2008.
Madigan's lawsuit said the S&P ignored the risks of those securities in giving them ratings that were favorable to the agency's investment bank clients and its own profits.
The performance of those investments had a significant impact on institutional investors in Illinois, including pension funds and 401(k) managers, the lawsuit said.
"The mortgage-backed securities that helped our market soar — and ultimately crash — could not have been purchased by most investors without S&P's seal of approval," Madigan said.
The lawsuit also cites testimony before Congress by a former managing director of the ratings agency who said "profits were running the show."
Madigan has also targeted mortgage lenders she accuses of having preyed on home owners.
Her office filed suit against Bank of America subsidiary Countrywide Financial Corp. in 2010. In that suit, Madigan accused Countrywide of consistently selling African-American and Hispanic borrowers riskier loans at a higher cost than it sold to white borrowers with similar credit ratings.
In December, the U.S. Department of Justice announced a settlement of $335 million with Bank of America that stemmed from that lawsuit.
Madigan is pursuing a similar lawsuit against Wells Fargo, which she also accuses of discriminatory lending.