The U.S. Dept. of Justice and more than a dozen states have filed suit against Standard & Poor's, alleging that the firm's inflation of mortgage investments cost investors billions when the financial crisis struck.
DOJ's complaint alleges violations of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Most of the state complaints accuse S&P of violating state trade practice or unfair competition laws. Only California sued S&P for violation of the state's False Claims Act.
Eric Havian of Phillips & Cohen LLP says that California may actually be targeting the issuers of mortgage backed securities and collateralized debt obligations.
Havian told Alison Frankel of Reuters that he wouldn't be surprised if California's strategy were to use discovery in the S&P case to see whether banks were aware of S&P's alleged ratings manipulation. “If issuers knew the ratings were false and they sold securities to state pension funds, they would absolutely be liable,” he said. “That’s an easy FCA case.”