SEC Contemplating Civil Fraud Charges Against Credit Rating Agencies

The U.S. Securities and Exchange Commission (the “SEC”) has been widely criticized for its credit rating agency oversight failures and, as we noted in a post several weeks ago (here), the SEC recently decided to propose new, tougher regulations to ensure that credit rating agencies don’t have conflicts with the issuers they rate. 

A June 17, 2011, The Wall Street Journal article indicates that that the SEC  may be going further than proposing new regulations. It is considering civil fraud charges against certain credit rating companies, including Standard & Poor’s and Moody’s, for their roles in providing undeserved positive credit grades on the mortgage-backed securities that triggered the financial crisis. 

According to the news article, the SEC is questioning whether the ratings companies committed fraud by failing to do enough research to be able to adequately rate the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals. This includes the rating agencies’ reliance on incomplete or out-of-date information  and ignoring clear signs of problems which resulted in unduly high ratings to slices of the deals that were sold to investors.

Abbey Spanier will continue to monitor the SEC’s investigation and report back with any relevant updates.