DES MOINES – Standard & Poor’s Ratings Services LLC (S&P) will pay the State of Iowa $21.5 million in a joint state-federal settlement over allegations that the company misled investors when it rated structured finance securities in the lead-up to the 2008 financial crisis.
Attorney General Tom Miller today announced the $1.375 billion S&P agreement with Iowa and 18 states, the District of Columbia, and the U.S. Department of Justice (DOJ). Under the agreement, half of the settlement money will go to the DOJ and the other half to the group of states.
“Standard & Poor’s stated that its ratings were objective,” Miller said. “But we alleged in our lawsuit that S&P put its own business interests ahead of objectivity, which distorted ratings and caused financial harm to Iowans and our nation’s economy,” Miller added. “Throughout this case it’s been a shared effort by our partner states and the Justice Department, which led to today’s good result and an end to the litigation. We also note that under the settlement terms we expect that S&P won’t repeat the past conduct that we alleged in our lawsuit.”
Lawsuits Alleged S&P Misled Investors through Ratings, Fueled 2008 Financial Crash
In a coordinated state-federal civil law enforcement effort by Miller, state attorneys general and the DOJ, government lawyers filed state and federal lawsuits.
According to Iowa’s consumer fraud lawsuit filed two years ago in Polk County District Court, S&P misled investors and market participants, including Iowans who relied on S&P to provide independent and objective analyses.
The lawsuit alleged that the credit rating agency allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients. The lawsuit further alleged that S&P’s pursuit of ratings fees led it to assign inflated credit ratings to toxic assets packaged and sold by the Wall Street investment banks. The alleged misconduct began as early as 2001 and became particularly intensive between 2004 and 2007.
Structured finance securities backed by subprime mortgages were at the center of the 2008 financial crisis. These financial products, including residential mortgage-backed securities and collateralized debt obligations, derive their value from the monthly payments consumers make on their mortgages.
After Miller and the state attorneys general filed their lawsuits, S&P sought to transfer and consolidate Iowa’s lawsuit with suits filed in 15 states plus the District of Columbia, and transfer all to the U.S. District Court in New York. Arguing these were state and not federal legal disputes, Miller and the states fought S&P’s jurisdictional challenge and prevailed. In June, U.S. District Judge Jesse Furman in Manhattan ruled the cases belonged in state courts.
Seven Public Employee Retirement Funds Receiving Iowa’s Settlement Money
$20 million of Iowa’s $21.5 million settlement will go to seven public employee retirement funds, which collectively serve more than 425,000 members.
The Iowa Insurance Division will be allocated $1 million for future securities enforcement efforts, and just over a half-million dollars will go to the Attorney General’s Consumer Education and Litigation Fund.
Public Employee Retirement Systems Allocations:
- Iowa Public Employees’ Retirement System (IPERS): $10 million
- Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) for the University of Iowa, Iowa State University and the University of Northern Iowa: $2.5 million
- Peace Officers’ Retirement System: $2.5 million
- Municipal Fire and Police Retirement System of Iowa: $2.5 million
- Iowa Judicial Retirement Fund: $2.5 million
State Government Allocations:
- Securities & Regulated Industries Bureau of the Iowa Insurance Division: $1 million
- Attorney General’s Consumer Education and Litigation Fund: $535,714
“Since pension funds like these suffered substantial losses when securities with inflated ratings were downgraded in the 2008 crisis and several of the systems helped us during the litigation process, it makes sense that we return lost investment money to these funds,” Miller said.
Additional Settlement Terms
In addition to the financial settlement, S&P, which denies liability, has agreed to a statement of facts acknowledging conduct related to its analysis of structured finance securities. S&P also agrees in the settlement to comply with Iowa’s Consumer Fraud Act and comparable laws in other states. In addition, for five years S&P has agreed to cooperate with requests for information from a state expressing concern over a possible violation of state law. Further, Miller and state attorneys general retain authority to enforce their laws – the same laws used to bring these cases – if S&P engages in similar conduct in the future.
The agreement resolves court proceedings involving S&P and its parent company, McGraw Hill Financial Inc., brought by Iowa, other participating states and the U.S. Justice Department.
In August 2014, the United States Securities and Exchange Commission (SEC) adopted new requirements for credit rating agencies that address conflicts of interest and procedures to protect the integrity and transparency of rating methodologies. The requirements also provide for certifications to accompany credit ratings attesting that the ratings were not influenced by other business activities.
