Rating agency Standard & Poor’s will cough up $8 million to the state of Massachusetts as part of a recent settlement over its rating of certain commercial mortgage backed securities (CMBS).
Along with the penalty paid to the Bay State, S&P will also pay penalties of $12 million to the state of New York and $35 million to the Securities and Exchange Commission (SEC). The rating agency will also pay the SEC $7 million in disgorgement and interest for those eight CMBS ratings in question.
According to statements from both attorneys general, between February and July of 2011, S&P loosened its ratings criteria for eight CMBS, did not disclose this fact to investors and misled market participants into thinking those ratings were made on more conservative assumptions than they actually were.
In addition to the penalties paid to Massachusetts, New York and the SEC, Standard & Poor’s has also agreed to cease and desist from violating the Martin Act and Executive Law and to refrain from rating any new CMBS conduit/fusion transaction for 12 months.
"These cases are a reminder that race to the bottom behavior… persists even though the crisis has ended," SEC Enforcement Director Andrew Ceresney said today in a conference call with reporters. "These cases reflect a deep cultural failure at S&P and a failure to learn the lessons of the crisis."
As part of the settlement, S&P admitted certain factors concerning its misrepresentations and omissions in connection with its rating of CMBS.
After the financial crisis of 2008, S&P told investors it had tightened its credit ratings standards and said its analyses would be free of commercial considerations. In rating the eight CMBS in question, the S&P essentially told investors it had rated those securities based on more conservative criteria than it actually used. Specifically, the ratings agency misled investors about its calculations of the debt service ratio, and the CMBS in question here actually provided less investor protection than the S&P lead investors to believe.
S&P was paid about $7 million to rate and conduct surveillance on six of those transactions.
