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California's official complaint against Standard & Poor's

California's official complaint against Standard & Poor's

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Published by Lairdh
California's official complaint against Standard & Poor's
California's official complaint against Standard & Poor's

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Published by: Lairdh on Feb 05, 2013
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·
.
KAMALA
D.
HARRIS 
Attorney General
of
California 
MARTIN
GOYETTE
(SBN 118344) Senior Assistant Attorney General 
DANETTE
E.
VALDEZ
(SBN 141780) Supervising Deputy Attorney General 
FREDERICK
W.
ACKER
(SBN 208109) 
CLARENCE BINNINGER
(SBN 190015) 
ANNADEL
A.
ALMENDRAS
(SBN 192064) 
SYLVIA
W.
KELLER
(SBN 197612) 
MYUNG
J.
PARK
(SBN
21
0866) 
KENNETH
J.
SUGARMAN
(SBN 195059) 
LUCY
F.
WANG
(SBN 199772) 
EMILY
C.
KALANITHI
(SBN 256972) Deputy Attorneys General 455 Golden Gate Avenue, Suite 11000 San Francisco, CA 94102-7004 Telephone:
.(
415) 703-5608 Fax: (415) 703-5480 E-mail:Rick.Acker@doj.ca.gov
Attorneys
for
the People
of
the State
of
California
SUPERIOR COURT OF THE STATE
OF
CALIFORNIACOUNTY
OF
SAN FRANCISCOCase No.
COMPLAINT
FOR
TREBLE
DAMAGES,CIVIL PENAL
TIES
AND PERMANENTINJUNCTION
FOR
VIOLATION OFTHE
CALIFORNIA
FALSE
CLAIMSACT, UNFAIR
COMPETITION
LAW,AND FALSE
ADVERTISING
LA V
PEOPLE
OF THE
STATE
OF
.CALIFORNIA,
Plaintiff,
v.
THE
MCGRAW-HILL COMPANIES,INC., STANDARD
&
POOR'S
FINANCIAL SERVICES LLC, AND DOES1-100, .
Defendants.
COMPLAINT
FOR TREBLE
DAMAGES,
CIVIL
PENALTIES
AND
PERMANENTTNJONCTIONFOR
VIOLATION
OF
THE
CFCA,
UCL,
AND
F
AL
 
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1
2 
3 
4 
6 
7 
8 
9 
11 
12 
13 
14 
16 17 18 19 21· 
22 
23 
24 26 
27 
28 
TABLE OF CONTENTSPage
INTRODUCTION
.......................................................................................................................... 1 
I. 
S&P's
Claims About
Itself
and Its Ratings .............................................................
1. 
II. Investors, Including California's Public Pension Funds, Relied
on S&P's 
Ratings ...................................................................................... .............................
2 
III. 
The
Truth About
S&P's
Integrity and Ratings ........... : ..........................................
2 
N.
The
House
of
Cards
Burns
Down
...........................................................................
4 
V. 
The
California Attorney General's Investigation .................................... ; ............. 5 VI. Even Today, S&P Continues to Resist Reform ...................................................... 6 PARTIES .........................................................................................................
·.:
.............................
6 
OTHERRELEVANT
ENTITIES ...................................................................................................
8 
JURISDICTION...............................................................................................................................
8 
VENUE
.................................................................................................... ...... : ......
.'~
........ , ............
8 
PERS,
STRS,
AND
OTHER
INVESTORS PURCHASED
STRUCTURED
FINANCE 
SECURITIES
IN
RELIANCE
ON
S&P'S
INTEGRITY
AND RATINGS:
..................................
8 
I. 
Structured Finance Securities Purchased
by
PERS
and
STRS ...........
........ : .....
..... 9 A. Residential Mortgage Backed Securities ...........
.'
........................................ 9 B. Structured Investment Vehicles ..................................................................
9 
II. 
S&P's
Ratings Played a
Key
Role
in PERS's
and
STRS's
Purchases
of
Billions
ofDollars Worth
of
Structured Finance Securities ........................... : .... 10 
S&P'S
REPRESENTATIONS
ABOUT
ITS INTEGRITY AND
RATINGS
.............................
12
I. S&P Knew and Intended That California's Pension
Funds
and
Others WouldRely
on Its Representations ..............
~
.......................................
~
................
12
II. 
S&P's
Representations
About
Its Integrity and Competence ...............................
13 
A. S&P Represented That It
WouldNot
Succumb to
theConflict
of
Interest Inherent
in
Its Issuer Pays Business
Model
and
Would
Not 
Act As
an Advisor on Securities It Rated .................................................
13 
B. S&P
R~presented
That It
Had
Adequate Staffing and
Resources
to Provide Credible Ratings ..........................................................................
14 
C.
. S&P Represented That It Monitored Securities After
Rating
Them 
to Ensure
That
They
Continued to Deserve
Their
Ratings .......................
15
III. 
S&P's
Representations Regarding Its Ratings ...................................................... 16 A. 
S&P's
Ratings Scale .................................................. ........................
~.:·····
~6
B. General Overview
of
S&P's
Rating Process ............................................. 16 
1. 
Overview
of
S&P's
RMBS Rating
Process
................................... 17 2.
S&P's
SN
Rating Process ....... ; ................................................... 17
ALL
OF
S&P'S
REPRESENTATIONS
WERE
KNOWINGLY
FALSE
................................... 19 
COMPLAINT
FOR
TREBLE DAMAGES,· CIVIL PENALTIES AND
P E ~ A N E N T
INJUNCTION FOR VIOLATION OF THE CFCA, UCL, AND F AL
 
 
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TABLE OF CONTENTS
(continued)
Page
I. 
Reasons False As to All Securities .......................................................................
21 
A.
S&P Weakened Its Rating Criteria
in
a Race
to
the
Bottomwith 
Moody's ....................................................................................................
21 
B. 
S&P Loosened Its Rating Criteria Process for All Asset Classes to Serve Its Market Share Goals .................................................................... 22
II. 
S&P Suppressed Necessary Updates to Its RMBS Levels Model
to
Preserve Market Share .......................................................................................... 25 
A.
S&P Used "Magic Numbers" and Guesses to Rate Deals
for the 
Sake ofMaintaining RMBS Market Share ............................................... 28B. S&P Further Corrupted Its Ratings Process for RMBS Comprised 
ofHELOC
and
ARM
Securities ............................................................... 29
C.
S&P Also Suppressed and Stalled Updates to Its CDO
Rating
. Model
and
Related Criteria .......................................................................
31 
D. S&P Diluted Its CDO Evaluator Model to Expand Its
Market
Share ....... 32
E. 
S&P Applied Fanciful Correlation and Related Criteria to
Keep 
Ratings High ............... _.............................................................................
33 
F. 
S&P Intentionally Ignored the
PIK
Stress Test.. ....................................... 36
G. 
S&P's
Rating Committees Also Relaxed
Their
Criteria to
the
Point Where
They
Would Rate Even a Deal "Structured
by
Cows"
............. , ... 36
H.
S&P Intentionally Ignored Its
Own
Rating
Policy
for
CDOs
of
_ RMBS ................
........................................................................................
37
I. 
S&P Also Used "Arbitrary" Tricks and "Tweaks" to the
CDO 
Model to Preserve Its Market Share
of
CMBS
......................................... 38
J.
S&P Viewed Its Ratings Models
As
a "Mousetrap" to
Achieve 
Favorable Ratings and Maintain Market Share .................
~
... ..................
39
K.
S&P Failed to Disclose Its "House-of-Cards" Ratings
Process
for CDO-Related Securities ............................................................................
41 
L. 
S&P Ignored Its
Own
Warnings About the "Powder
Keg" 
Mortgage Market. .....................................................................................
.
41 
M. S&P Also "Grandfathered" RMBS and
CDO
Deals
Using
Different "Tricks" to Avoid Losing Market Share ............................................ , .....
43 1. 
S&P Refused
to
Apply
More
Accurate Rating
Modelsor
Information
toRe-Rate
Already Rated RMBS .............................
43
2. S&P Also Grandfathered CDO Securities ..................................... 44N. . S&P Starved Key Rating and Monitoring Groups
of
Staffand 
Needed Resources As an Excuse to Avoid Losing Business ................... 45
III. 
Reasons False As to SIVs ............................................
~
........................................
48
A. S&P Inflated the Ratings
of
the SIVs and
the
Securities
They 
Issued .................... , .................................................................................. 48
11 
COMPLAINT
FOR
TREBLE DAMAGES,
CIVIL
PENALTIES AND
PERMP...NENT
INJUNCTION
FOR
VIOLATION
OF
THE
CFCA,
UCL, AND
FAL

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