LOS ANGELES, Feb. 5 (UPI) — California has sued credit rating firm Standard & Poor’s, alleging it issued ratings that cost the state’s public pension funds about $1 billion.
State Attorney General Kamala Harris announced Tuesday the state will seek $4 billion in the lawsuit, filed in San Francisco Superior Court, accusing the largest credit rating agency on Wall Street of violating California’s False Claims Act.
The announcement came after the U.S. Justice Department said it was seeking $5 billion in a fraud case against Standard & Poor’s for misleading ratings.
In a news conference Tuesday, U.S. Attorney General Eric Holder said the ratings firm was operating under a conflict of interest as it passed judgment on subprime mortgage securities banks bundled together before the housing market bubble collapsed.
As banks were also paying for the service, S&P had motivation to give their products high ratings, a lawsuit filed by the federal government, 16 states and the District of Columbia contends.
The case filed in a federal court in Los Angeles says S&P promised its ratings “were objective, independent” and “uninfluenced by any conflict of interest.”
Harris — in Washington for the announcement of the federal and state lawsuits — told the Los Angeles Times Standard & Poor’s “pretended to be an independent agency and we believe the evidence is clear it was quite the contrary.”
The Wall Street Journal reported the case against S&P includes an allegation that one of its securities analysts sent an email that included a spoof of the Talking Heads song “Burning Down The House,” but with lyrics that joked about the collapsing housing market.
The email was allegedly sent March 19, 2007, and it went to several colleagues. It was followed up by a video sent out two days later that showed the analyst singing the song, while other co-workers laughed, the lawsuit says.
One of the analysts who received the song lyrics, and passed them along to others later, evaluated mortgage securities highly and the value of those securities later collapsed. One investor lost $90 million when the securities failed, the Journal reported.
S&P, which is owned by McGraw-Hill, said it would “vigorously defend” itself in court. The claims filed against it were “unwarranted,” the company said.
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