NEW YORK – Credit ratings agencies Moody’s, Standard & Poor’s, and investment bank Morgan Stanley have reached agreements to settle two lawsuits on accusations that they hid the risk of “subprime” mortgage investments to customers.
The lawsuits, one from King County in northwestern US state of Washington, the other from Abu Dhabi Commercial Bank, and which date back to before the 2008 economic meltdown, were dismissed by a Manhattan federal court, according to a court filing late on Friday.
The plaintiffs claimed that the defendants failed to properly disclose the risk of their investment in a fund that bought bonds backed by subprime mortgages.
The McGraw-Hill Companies, the parent company of Standard and Poor’s, told AFP that it ended the two disputes without admitting guilt or responsibility, and that the terms of the agreement were confidential.
Spokespeople for Morgan Stanley and Moody’s were not immediately available for comment.
The trial was especially crucial for S&P: on February 5 the US Justice Department filed a lawsuit seeking at least $5 billion in civil penalties for losses due to inflated ratings of mortgage bonds.
The suit claims that S&P knowingly exaggerated the ratings on financial securities, misrepresenting their true credit risk.
The suit cited S&P’s top-grade ratings of dozens of mortgage-based collateralized debt obligations (CDOs) issued in early 2007 that were in default within one year, some within six months.
The defaults dealt billions of dollars in losses to financial institutions insured by the US government, some of which collapsed in the 2008 crisis and others, like Citigroup, forced to seek a government bailout.
S&P was specifically charged with wire fraud, mail fraud and financial institution fraud.