On February 5, 2013, the California Attorney General (AG) filed a complaint against Standard & Poor’s Financial Services, LLC (S&P) and the McGraw-Hill Companies, Inc., alleging that they violated the California False Claims Act. The AG alleges that S&P intentionally inflated its ratings of structured finance securities to increase its market share and revenue. California’s two largest public pension funds, CALPERS and CALSTRS, purchased billions of dollars worth of securities relying on S&P’s allegedly false and fraudulent ratings. Further, the public pension funds had rules that required them in many instances to purchase only AAA-rated structured finance securities, and S&P knew that the public pension funds relied on its ratings to meet these requirements. According to the AG, S&P knowingly inflated its ratings to influence the public pension funds’ purchase of the securities, thereby causing the submission of false or fraudulent claims for payment to CALPERS and CALSTRS in violation of the California False Claims Act. The AG further alleges that S&P knowingly made these false statements about its ratings to get the false or fraudulent claims paid or approved by CALPERS and CALSTRS. The AG also alleges that S&P’s conduct violated Business & Professions Code sections 17200 and 17500. A copy of the complaint is available here.
The California Attorney General’s lawsuit against S&P followed a similar suit filed by the U.S. Department of Justice on February 4, 2013, alleging that S&P’s fraudulent ratings contributed to the 2008-2009 financial crisis and caused banks and federal credit unions to lose $5 billion. To date, twelve other states and the District of Columbia have filed similar suits against S&P. However, California is the only state to pursue claims under its false claims act.
On March 12, 2013, the court issued an order extending the defendants’ deadline to demur, answer, move to strike or otherwise respond to the complaint to July 12, 2013.