(Reuters) - The government is seeking $5 billion in its civil lawsuit against Standard & Poor's, accusing the ratings service of defrauding investors, in one of the most ambitious cases yet from the Justice Department over conduct tied to the financial crisis.
The United States said S&P inflated ratings and understated risks associated with mortgage securities, driven by a desire to gain more business from the investment banks that issued those securities. S&P committed fraud by falsely claiming its ratings were objective, the lawsuit said.
"Put simply, this alleged conduct is egregious - and it goes to the very heart of the recent financial crisis," said Attorney General Eric Holder at a news conference in Washington announcing the charges.
The 119-page lawsuit, filed late Monday in federal court in Los Angeles, is the first from the government against a ratings agency, a sector that has generally shielded itself from liability by citing First Amendment protection of free speech.
Sixteen states and the District of Columbia are also suing S&P, a unit of the McGraw-Hill Companies Inc. McGraw-Hill shares fell as much as 8.9 percent on Tuesday, after dropping 13.8 percent on Monday.
No individuals were charged in the DOJ's lawsuit, and it was not immediately clear why the government focused on S&P instead of rivals Moody's Corp or Fimalac SA's Fitch Ratings, which were also major raters of such securities.
The 2007-2009 financial crisis was due in large part to massive losses triggered by risky mortgage loans packaged and sold to investors, often with top ratings from credit raters.
S&P issued a statement on Tuesday saying the lawsuit is meritless and that it will vigorously defend itself. It said the government "cherry picked" emails to misconstrue analyst activity.
"Claims that we deliberately kept ratings high when we knew they should be lower are simply not true," the company said.