S&P settles class action lawsuit in Australia over awaring high ratings to SCDOs

Much of the turmoil that shook the world’s capital markets in 2007-2009 can be traced back to the assigning of high ratings to synthetic collateralized debt obligations (SCDOs).

On Friday, U.S.-based rating agency Standard & Poor stated it has settled a class action lawsuit in Australia over claims by local governments and pension funds that it had overlooked risks when awarding high ratings to risky investments during the 2007-2009 period.

S&P did not disclose the settlement amount nor its terms.

“S&P Global is pleased to reach a settlement on the class action lawsuit, the last of the significant litigation pertaining to our previous ratings actions on collateralized debt obligations,” said S&P.

Two local governments along with two pensions funds in Australia had sued S&P for at least $140 million (A$190 million) when they lost money on synthetic collateralized debt obligations (SCDOs) which were rated by S& during the U.S. subprime mortgage crisis.

The settlement of the class action lawsuit, which was funded by Litigation Capital Partners, a Singapore-based litigation firm, protects S&P from further suits from other investors since legal avenues have now lapsed.

As per a spokesman for the plaintiffs, the terms of the settlement are confidential.

While the case was on, lawyers for the local councils had accused S&P of weakening its risk assessment criteria in order to win more business; they also accused the ratings firm of giving high ratings on opaque debt products.

In a statement, S&P said, it had designed and assigned ratings in line with well-recognized international practices and Australian regulations.

This is not the first time S&P has settled lawsuits following the turmoil of the global financial crisis. In the United States, S&P has settled multiple lawsuits over its ratings of CDOs – products that were to blame for spreading market risks around the world.

Investors, regulators and politicians have repeatedly criticized the ratings firm for assigning high ratings to securities that quickly turned bad. Criticism specifically focuses on the fact they are paid by issuers for ratings, raising concern about potential conflicts of interest.

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