New York Attorney General Eric Schneiderman is investigating Standard & Poor's to determine whether it failed to follow its own methodology in rating commercial-mortgage bonds (CMBS) in order to win business from banks, according to two people with knowledge of the matter.
The unit of McGraw Hill Financial Inc. is facing scrutiny on six such deals it graded in 2011, said the people, who asked not to be identified because the probe hasn't been made public. Ed Sweeney, a spokesman for S&P in New York, declined to comment, as did Matt Mittenthal, a spokesman for Schneiderman.
The New York Attorney General's office is at least the third government agency investigating S&P's business of grading commercial mortgage-backed securities, in which banks pool together loans on properties such as shopping malls, hotels, and skyscrapers to create securities that are sold to investors.
S&P said in July it received a notice from the U.S. Securities Exchange Commission (SEC) that the regulator may seek an enforcement action related to the firm's CMBS ratings in 2011. Massachusetts Attorney General Martha Coakley is also looking into how the firm rated such securities, people familiar with the matter said last year.
The ratings firm is separately facing a $5 billion lawsuit filed by the U.S. Justice Department in February 2013, alleging that S&P and its parent inflated ratings on bonds backed by home loans made to the riskiest borrowers to win business from Wall Street banks. S&P, along with Moody's Investors Service and Fitch Ratings, were blamed for helping trigger a financial crisis that sent the world's largest economy into its longest recession since 1933.
After the Justice Department filed the lawsuit, S&P said it would defend itself “vigorously” against the “meritless” claims.
Four days before receiving the SEC warning on July 22, S&P cut almost a third of its CMBS group and transferred department head Peter Eastham to a role in his native Australia, according to a person with knowledge of the move. Following the reduction, there were about 32 people in the group.
The SEC alleged violations related to the CMBS rankings and “public disclosure made by S&P regarding those ratings thereafter,” according to a July 23 regulatory filing. The SEC may pursue actions including a cease-and-desist order, civil money penalties, or a suspension or revocation of the firm's ratings accreditation.
Grading securities tied to debt on skyscrapers, hotels, and shopping centers is one of the most lucrative businesses for ratings companies. The firms generally charge between $1.25 million and $2 million to grade a commercial mortgage bond, which bundles the loans into securities of varying risk, according to an October 2011 Federal Reserve paper.
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