The US government says it wants five billion dollars from Standard & Poor’s.
In a law suit the Department of Justice is taking the agency to court over the ratings it gave to mortgage backed bonds. Those were the investments at the centre of the sub-prime collapse that triggered the financial crisis.
The civil fraud lawsuit is the first such action against a credit rating agency and S&P responded that it was “entirely without factual or legal merit” and it will vigorously defend itself.
It said the government had “cherry picked” emails to misconstrue analyst activity.
“Claims that we deliberately kept ratings high when we knew they should be lower are simply not true,” the company added.
The law suit accused S&P of consistently defrauding investors by saying its ratings were independent and not clouded by conflicts of interest, even though the firm’s analysts were disregarding risks posed by mortgage securities in order to gain business from the investment banks that issued them.
At the US Justice Department Attorney General Eric Holder said: “Put simply, this alleged conduct is egregious – and it goes to the very heart of the recent financial crisis.”
Reportedly S&P and the Justice Department had discussing a settlement of more than one billion dollars - over 740 million euros – but those talks broke down.
Investors, politicians and regulators have long criticised agencies like S&P for giving high ratings to thousands of subprime and other mortgage backed securities that turned out to be not worth the paper they were printed on.
It is not clear why regulators are focusing on S&P rather than the other big ones Moody’s or Fitch.
The lawsuit hammered the shares of all the rating agencies on fears that more could follow.
US government goes after S&P over subprimes