The lawsuit alleges that S&P pursued this course of action in a desire to gain more business from investment banks that issued those securities. S&P committed fraud by falsely claiming its ratings were objective, according to the lawsuit. "Put simply, this alleged conduct is egregious - and it goes to the very heart of the recent financial crisis," said Attorney General Eric Holder at a news conference in Washington announcing the charges.
The 119-page lawsuit, filed late Monday in federal court in Los Angeles, is the first from the government against a ratings agency, a sector that has generally shielded itself from liability by citing First Amendment protection of free speech, Reuters.com reported.
In addition to the Department of Justice action, more than a dozen separate lawsuits have been brought against S&P by 16 states and the District of Columbia.
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Holder said that the DOJ lawsuit was brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allows the DOJ to seek civil penalties equal to the losses suffered by federally insured financial institutions.
“To date, we have identified more than $5 billion in such losses, resulting from CDOs that were rated by S&P between March and October 2007. During this period, nearly every single mortgage-backed CDO that was rated by S&P not only underperformed but failed,” Holder said.