The SEC is weighing civil fraud charges against some credit-rating companies for their role the in the financial crisis.  The Commission's long-running probe into the mortgage-bond deals that helped unleash the crisis now includes scrutiny of such major credit-rating firms as Standard & Poor's. 

This latest news should not necessarily come as a surprise, given the fact that lawmakers have, for some time, criticized this group as "key enablers" of the financial meltdown, helping to fuel the $1 trillion Wall Street mortgage-securities machine before the boom ended.  The major ratings firms, nonetheless, have until now largely avoided any regulatory crackdown and beaten back private lawsuits.  In fact, their business has rebounded as financial markets regained their footing.

SEC Now Considers Bringing Fraud Charges.   the WSJournal's Jean Eaglesham reports the SEC's new tact, as SEC officials focus on the question of whether the ratings companies committed fraud by failing to do enough research to be able to rate adequately the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals, according to people familiar with the matter.  SEC charges  against rating companies could be based on allegations that these companies:

• relied on incomplete or out-of-date information supplied to them on the pools of loans in the mortgage-bond deals; or,
• ignored clear signs of problems among subprime loans and so gave unduly high ratings to slices of the deals that were then sold to investors.

This differs from cases involving financial firms, where regulators commonly accuse the firms of fraud for allegedly misrepresenting information to investors, either recklessly or intentionally.

Standard & Poor's.   The SEC is looking closely at the conduct of this unit of McGraw-Hill Cos., but also is said to be reviewing what, if any, role was played by Moody's Investors Service in at least 2 mortgage-bond deals.  Of course, the inquiry may not lead to charges against any of the credit-rating firms.

A Standard & Poor's spokeswoman declined to comment. Michael Adler, a spokesman for Moody's, said: "Although Moody's is uncertain as to what The Wall Street Journal is referring, we would certainly cooperate with any requests we receive from the SEC."

New Wave of Cases Against Banks, Other Financial Firms.   Other cases involving fraud allegations are expected shortly, with the SEC reportedly aiming for a second wave of settlements in the fall - and a 3rd and final group possible by the end of the year.

JPMorgan Chase is among the first banks in line for a settlement of charges expected by the SEC.  A settlement is expected within weeks on allegations related to JPMorgan's sale of a $1.1bn mortgage-bond investment called Squared, just as the housing market was collapsing in early 2007. JPMorgan and most of the other banks that are expected to face allegations of fraud in relation to mortgage-bond deals are expected to agree to pay about half or less than the $550mn that Goldman paid to settle the SEC charges.  .

Other financial firms in the SEC probe include Citigroup Inc., Morgan Stanley, Bank of America Corp.'s Merrill unit and UBS AG, according to people familiar with the matter.  The companies declined to comment.

For further details, go to:   [WSJ-online, 6/17/11]