..Exclusive: SEC acknowledges challenges in credit-rating probes
By Sarah N. Lynch, David Henry and Andrea Shalal-Esa | Reuters – 18 mins ago
WASHINGTON/NEW YORK (Reuters) -The Securities and Exchange Commission faces hurdles proving wrongdoing at credit-rating agencies, the SEC’s enforcement chief said in an interview shortly after it was learned that his office may sue Standard & Poor’s for breaking securities laws.
“There are some statutory challenges in the law, and some disclosure-related challenges that are unique to credit-rating agencies that can make the cases more challenging,” SEC Enforcement Director Robert Khuzami told Reuters in an interview on Tuesday.
“But, we don’t let that stop us from investigating possible misconduct,” Khuzami added. “We are looking hard at them.”
Khuzami declined to comment specifically on S&P. S&P’s parent, the McGraw-Hill Cos Inc, disclosed on Monday that it may become the first major credit-rating company to be sued by the SEC for its grading of complex structured products during the financial crisis.
Khuzami’s descriptions of the challenges he faces come as financial and legal experts puzzle over why the SEC has taken a step against only S&P when Moody’s Investors Service and Fimalac SA’s Fitch Ratings also gave the same bonds their highest grades just months before they were marked down to junk.
“I just don’t get why S&P is being singled out here,” said Janet Tavakoli, a structured finance consultant. “I don’t see much difference between the ratings from the three agencies.”
Khuzami said there can be many reasons why law enforcers go after one firm and not another.
Without commenting specifically on the S&P matter, he said that “different actors might analyze a product in different ways, or one may know things that another does not.”
It can also just be a simple issue of timing, he said, noting that cases against “similarly-situated parties” do not always move at the same pace.
“It is the painstaking job to build cases involving complex transactions or products,” he said. “You look at individual emails, individual pieces of testimony, and piece together a circumstantial case, arguing that the most reasonable inference from the evidence is that the defendant knew X and said Y, and did it with wrongful intent.”
In fact, some legal experts believe that the SEC may be singling out S&P over other raters specifically because of an email trail that it left behind in the crisis, even though other ratings firms may have behaved similarly.
Some emails, which were unearthed by U.S. Senate investigators, reveal that analysts at S&P had doubts about the agency’s ratings for bonds issued by a collateralized debt obligation known as Delphinus CDO 2007-1. That CDO is now at the center of the SEC probe of S&P.
Give away the store (in 55 minutes!) and now want to sue? Laughable