Tony West, the acting associate attorney general at DOJ, said that Standard & Poor's promised "objective and independent" ratings for residential mortgage-backed securities and collateralized debt obligations. "But the evidence we have uncovered tells a different story," West said.
West said the agency, for instance, knew it was going to downgrade the ratings on a certain class of mortgage bonds but did nothing to adjust the ratings to reflect that inevitability.
"It's sort of like buying sausage from your favorite butcher, and he assures you the sausage was made fresh that morning and is safe," West said. "What he doesn't tell you is that it was made with meat he knows is rotten and plans to throw out later that night."
Holder said the government was "always open" to conversations with the lawyers representing the agency, a team that includes Floyd Abrams, a litigation partner in the New York office of Cahill Gordon & Reindel.
Standard & Poor's said in a formal statement that DOJ claims "that we deliberately kept ratings high when we knew they should be lower are simply not true. We will vigorously defend S&P against these unwarranted claims." The company added that, "unfortunately, S&P, like everyone else did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected."
The federal suit was filed under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 to seek penalties that equal the losses suffered by federally insured financial institutions. Under this law, DOJ said it can seek penalties for the violation of criminal law, including mail, wire and bank fraud. The burden of proof, however, remains a preponderance of the evidence.
"Rating agencies have never faced enforcement on these grounds before," said Jeffrey Manns, an associate professor at The George Washington University Law School who specializes in banking and securities law. Still, the government, he said, "has a high burden to show that S&P knowingly committed fraud."
The Connecticut Law Tribune staff contributed to this article.