Moody’s, S&P settle suit over misleading ‘subprime’ ratings

Standard & Poor's and Moody's, two of the world's leading credit rating agencies, along with investment bank Morgan Stanley have reached agreements to settle two lawsuits on accusations that they hid the risk of "sub-prime" mortgage investments to customers.

The settlement on Friday averts a highly anticipated lawsuit, avoiding what would have been the two agencies' first jury trial over crisis-era ratings.

The lawsuits by 14 plaintiffs, led by Abu Dhabi Commercial Bank and King County, Washington, were settled and the charges dismissed by a Manhattan federal court, according to a court filing late Friday.

The lawsuits date back from before the 2008 economic meltdown. The plaintiffs claimed that the defendants failed to properly disclose the risk of their investment in a fund that bought bonds backed by sub-prime mortgages.

The McGraw-Hill Companies, the parent company of Standard and Poor's, told AFP that this ended the two disputes without admitting guilt or responsibility, and that the terms of the agreement were confidential.

Spokespeople for Morgan Stanley and Moody's have not commented so far.

The trial was especially crucial for S&P, as the US Justice Department had filed a lawsuit on 5 February seeking at least $5 billion in civil penalties for losses due to inflated ratings of mortgage bonds.

The suit claims that S&P knowingly exaggerated the ratings on financial securities, misrepresenting their true credit risk.

The suit cited S&P's top-grade ratings of dozens of mortgage-based collateralised debt obligations (CDOs) issued in early 2007 that were in default within one year, some within six months.

The defaults dealt billions of dollars in losses to financial institutions insured by the US government, some of which collapsed in the 2008 crisis and others, like Citigroup, forced to seek a government bailout.

S&P was specifically charged with wire fraud, mail fraud and financial institution fraud.