DOJ, State AGs File Civil Fraud Suits against Ratings Agency over RMBS Ratings; BuckleySandler Offers Complimentary FIRREA Webinar

Posted on February 11th, 2013 in Federal Issues, Mortgages, Securities By BuckleySandler

On February 5, the DOJ filed a lawsuit in the Central District of California against a major credit rating agency, alleging that the firm defrauded investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by issuing inflated ratings that misrepresented the securities’ true credit risks, and by falsely representing that its ratings were uninfluenced by its relationships with investment banks. According to the complaint, the agency publicly represented that its ratings of RMBS and CDOs were objective and independent, notwithstanding the potential conflict of interest posed by the agency being selected to rate securities by the investment banks that sold those securities. The complaint alleges that, in fact, fear of losing market share and profits led the company to (i) weaken the ratings criteria and analytical models it used to assess credit risks posed by RMBS and CDOs, and (ii) issue inflated ratings on hundreds of billions of dollars’ worth of CDOs. When CDO’s rated by the agency failed, investors lost billions of dollars. The DOJ brings claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), alleging that the company engaged in (i) mail fraud affecting federally insured financial institutions, (ii) wire fraud affecting federally insured financial institution, and (iii) financial institution fraud, and seeks civil penalties up to the amount of the losses suffered as a result of the alleged violations. The DOJ believes such losses total $5 billion to date.

Also on February 5, the attorneys general for at least 12 states and the District of Columbia announced state court actions against a ratings agency in coordination with a parallel federal suit filed on the same day, as described above. The actions announced by the AGs for Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Iowa, Maine, Missouri, North Carolina, Pennsylvania, Tennessee, and Washington, allege violations of various state laws related to the same general conduct outlined in the federal complaint, i.e. that the ratings agency defrauded investors, including state pension funds, by inflating ratings of certain RMBS and CDOs for private gain, while publicly maintaining that the ratings were objective assessments of the risks posed by the securities. At least three states, Connecticut, Illinois, and Mississippi, are continuing to pursue similar, previously filed, suits against the same agency.

Join BuckleySandler for a complimentary webinar on Thursday, February 21, 2013, from 2:00-3:00 PM ET, to review this latest and largest of a series of fraud lawsuits brought by the government under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), a financial fraud statute that has been on the books for decades but only recently has been aggressively enforced. Andrew Schilling, Ross Morrison, and Michelle L. Rogers will discuss the reach and limitations of FIRREA, its recent rediscovery by DOJ, and where DOJ may go from here. Click here to register.

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