Biden Sues Major Ratings Agency, Continues to Seek
Accountability for Economic Crisis
WILMINGTON – Delaware Attorney General Beau Biden announced on Feb. 5 that his office has filed a lawsuit against Standard & Poor’s, charging that the ratings agency misled investors by misrepresenting the independence and objectivity of its evaluations of the risk of certain mortgage-backed securities.
S&P promoted its ratings to investors as independent and unbiased. In reality, spurred by a desire to make money, S&P rated mortgage-backed securities as safe investments even though its analysts knew the investments were risky. The alleged deception had devastating consequences for the nation’s economy as investors, who thought they were putting money into safe investments, lost billions when the housing market crashed and brought the economy to the brink of collapse.
“One of the things that has made America great is the credibility of our financial markets,” Biden said at a press conference announcing the joint federal-state law enforcement action.
“Our markets and our economy only work when everyone plays by the rules. Those who break the rules must be held accountable. S&P broke the rules by sacrificing its independence to make more money, and the results wrecked our economy. My office has filed a complaint to hold S&P accountable for deceiving consumers and investors by publicly misrepresenting the independence and objectivity of its credit ratings. The ratings were neither independent nor objective.”
Twelve other states and the federal government also filed suits on Feb. 5. All of the suits allege that S&P told investors and consumers that the agency had fairly and impartially evaluated mortgage-backed securities. The suits claim S&P purposefully chose to rate the securities as being much safer than they actually were so S&P could continue to collect fees from the institutions that were selling the securities.
Biden’s suit, filed in Delaware Superior Court, includes four counts charging S&P with violations of Delaware’s Consumer Fraud act and six Counts charging violations of Delaware’s Deceptive Trade Practices Act. It seeks civil penalties, restitution, and changes to the company’s business practices.
The suits focus on ratings S&P made beginning in 2001, and while most of the ratings activity on subprime-backed mortgage securities occurred between 2004 and 2007, Delaware’s suit alleges this activity continued in 2011 and 2012.
Investors make money off of mortgage-backed securities when homeowners make their monthly mortgage payments. These securities consist of large numbers of mortgages that are bundled together, and securities backed by higher-quality loans should be rated higher than securities backed by riskier, subprime mortgages.
The state and federal suits allege that, despite S&P’s repeated statements emphasizing its independence and objectivity, it allowed its analysis to be influenced by the desire to earn lucrative fees from its investment bank clients and to knowingly assign inflated credit ratings to subprime mortgage-backed securities that were packaged and sold by investment banks. Those investors then lost significant sums of money when the housing market crashed and borrowers defaulted on subprime mortgage loans.
The lawsuit against S&P is the latest of several actions Biden and his team have taken to hold accountable those responsible for the financial crisis:
- Delaware, 48 other states and the federal government reached a historic $25 billion agreement with the nation’s five largest servicing banks in February 2012 to settle claims that the banks engaged in misconduct that led to improper foreclosure pracices. In the settlement, Biden secured $45 million for Delaware. The settlement also included important new protections for the men and women serving in the military. Biden’s office led the fight to ensure those protections were part of the agreement.
- Biden’s office secured important reforms from the Mortgage Electronic Recording System, which Biden filed suit against in October 2011. Biden alleged that MERS, the shadow mortgage registry at the center of the housing crisis repeatedly violated the state’s Deceptive Trade Practices Act. According to the suit, MERS engaged in deceptive trade practices that sow confusion among homeowners, investors, and other stakeholders in the mortgage finance system, seriously damaging the integrity of the land records that are central to Delaware’s real property system, and leading to improper foreclosure practices.
- Following an investigation by Biden’s office into allegations of “robo-signing” and other improper mortgage services provided by subsidiaries of Lender Processing Services, Inc., LPS in the fall of 2012 paid $250,000 to the State of Delaware. The agreement resolves claims that LPS subsidiaries, including DocX LLC, engaged in practices known as “robo-signing” and “surrogate-signing” when preparing and executing mortgage-related documents, some of which were ultimately filed with county Recorder of Deeds offices throughout Delaware in 2008 and 2009. The Attorney General’s investigation revealed that some of these improperly prepared documents were subsequently filed in Recorders of Deeds offices in Delaware’s three counties. LPS and its subsidiaries earned approximately $60,000 in revenue from their Delaware activities during the timeframe covered by the settlement.
- To help homeowners hit hard by the financial crisis, Biden worked with the General Assembly to create an Office of Foreclosure Prevention and the Delaware Mortgage Mediation Program. If you are a homeowner who is having difficulty keeping up with your mortgage or facing foreclosure, please call 800-282-5424 immediately.
“We cannot allow the housing crisis to go down in history as a manmade disaster for which no person or entity was held accountable,” Biden said. “The American people, who have been through so much, deserve no less.”