Last week my Reuters colleagues Luciana Lopez, Peter Rudegeair and Matt Goldstein published a piece contending that the JusticeDepartment’s fraud suit against the credit-rating agency Standard & Poor’s may turn out to be a bust. Despite purportedly damning internal S&P emails quoted in the Justice Department complaint, a dozen securities lawyers told Reuters that the government would be hard-pressed to show that S&P deliberately skewed ratings to retain market share or that the presumably sophisticated credit unions and other financial institutions that relied on S&P’s ratings were actually gulled into investment decisions. Said one structured finance consultant: “It is a crappy case.”
I’m not so sure S&P can hold out for long enough to obtain a ruling on the merits of the government’s complaint; few companies can withstand the withering effect of defending against Justice Department allegations. And in the meantime, S&P faces collateral damage in various private cases raising allegations that the credit-rating agency misled investors about mortgage-backed securities. Last week, in what seems to be the first fallout from the Justice Department suit in a private case, a Pennsylvania state court judge ordered S&P to turn over millions of pages of documents it produced to the government to the Federal Home Loan Bank of Pittsburgh, which is suing the credit-rating agency for fraud stemming from its losses in mortgage-backed securities.
Judge Stanton Wettick of the Allegheny County Court of Common Pleas had previously denied an FHLB motion for documents S&P turned over to the government, but he said that the Justice Department complaint, which raised allegations similar to the FHLB’s claims, made S&P’s production to the FHLB of the documents it gave to the government “very relevant to this litigation.” Wettick rejected arguments by S&P’s lawyers at Cahill Gordon & Reindel that materials from the government’s broad investigation of the rating agency’s CDO practices were not related to the FHLB’s lone remaining MBS fraud claim, as well as arguments that the rating agency has spent a lot of time and money tailoring the production of 500,000 documents to the FHLB in the four years since the home loan bank filed suit. S&P said it would be “inappropriate” at this late stage of the litigation to throw another 20 million pages of discovery into the FHLB case.
The judge, however, agreed with FHLB’s lawyers at Robins, Kaplan, Miller & Ciresi that the government’s claims were (to quote the bank’s motion to compel) “hauntingly similar” to their own. “The benefits of such discovery,” he wrote, “outweigh the burdens imposed on S&P.”
FHLB counsel Stacey Slaughter of Robins Kaplan told me that Wettick’s ruling will permit the bank access to untold internal documents S&P has so far avoided producing in the private case. “This opens up a lot of material to us,” she said. “That’s the advantage to being the Justice Department. Defendants can’t say, ‘No, I’m not going to turn it over,’ when Justice wants it.”