Standard & Poor's Ratings Services could face a much higher legal bill than the $5 billion sought by the federal government as more and more states join the battle against the credit-ratings firm.
A raft of lawsuits this week from attorneys general from several states, including California and Iowa, is compounding S&P's legal woes over its role during the financial crisis of 2008-2009.
On Tuesday, the Justice Department sued S&P for allegedly causing some banks and credit unions to lose $5 billion after relying on the company's ratings of mortgage-linked securities.
However, the $5 billion claim, which S&P has dismissed as "meritless," is only part of the legal battle being fought by the world's largest credit-ratings firm by number of deals rated.
Thirteen states and the District of Columbia have followed in the Justice Department's footsteps, filing separate lawsuits against S&P on Tuesday. The California attorney general alone is suing S&P for about $4 billion to recover funds for two of the country's largest public pension funds, according to its lawsuit.
Other states, such as Colorado and Arkansas, are demanding S&P give back the revenue it earned on precrisis ratings of hundreds of securities. State prosecutors allege S&P presented its ratings as based on objective and independent analysis but actually were inflated to cater to the banks that helped arrange and sell the securities.
In a statement Wednesday, an S&P spokesman said "any allegations that we compromised our analytic integrity for business considerations are simply false."
Not all of the states' lawsuits specify the amount they are seeking. However, a 2011 Senate report pegged S&P's revenue on mortgage-related securities at $2.3 billion from 2002 to 2007.
Some state prosecutors said they are unlikely to recover the full amount they are seeking and acknowledge that a settlement with S&P could bring less. Even so, the lawsuits are a legal overhang for S&P and its parent company, McGraw-Hill Cos., whose shares are down 24% since Friday. The Wall Street Journal reported the Justice Department's suit on Monday. Shares fell 0.7% on Wednesday, to close at $44.61.
The new lawsuits add to three outstanding cases filed against S&P since 2010 by Connecticut, Illinois and Mississippi. Several more states are likely to file suits in coming weeks, the Justice Department said on Tuesday. State and federal prosecutors have been working together for about three years, trading strategies and pouring over millions of pages of internal S&P correspondence to build their case, according to people familiar with the matter.
Consumer-protection and other state laws allow attorneys general to pursue claims against companies like S&P if they can prove that investors and companies in their own state were harmed. The Justice Department's case against S&P only covers losses allegedly suffered by federally backed banks and credit unions. In California's lawsuit, Attorney General Kamala Harris alleges that the state's two big pension funds, California Public Employees' Retirement System and California State Teachers' Retirement System, lost a total of $1 billion on residential-mortgage-backed securities and other deals rated by S&P from 2004 to 2007. State law allows California to seek damages equal to three times those losses, for a combined total of more than $4 billion.
While the federal government is just embarking on what looks to be a bitter battle with S&P, some of the states said the wind is at their backs. The suits by Illinois and Connecticut are moving through the courts, after state judges there rejected S&P's requests to end the cases. Mississippi's case also is pending.
"The momentum is clearly with us," Connecticut Attorney General George Jepsen said in an interview. "S&P, in addition to facing the Department of Justice, faces a solid front of state lawsuits all built on a legal theory that has twice passed muster." S&P has said it stands behind its ratings. Connecticut and Mississippi also have sued S&P rival Moody's Corp.'s Moody's Investors Service on similar grounds. Moody's has said in the past that it would fight the suits. But the majority of other attorneys general have focused exclusively on S&P.
"S&P is the largest credit-rating agency in the world," Illinois Attorney General Lisa Madigan said on Tuesday. "The evidence against S&P is very strong." The lawsuits "really demonstrate that there is an expanding effort to hold S&P accountable for the central role they played in the financial collapse," she said.
The California lawsuit says that S&P's alleged focus on market share at the expense of ratings quality has continued after the financial crisis. A spokesman for the Massachusetts attorney general said prosecutors there were also looking at S&P's conduct after the financial crisis.
"Our office is engaged in our own related investigation into this matter, and we are closely monitoring this lawsuit filed by other attorneys general," the spokesman said.