The Justice Department accused Standard & Poor's of issuing faulty credit ratings on securities tied to mortgages, but whether the company's practices equate to fraud will be difficult to prove, according to an analysis yesterday in the New York Times DealBook blog. The government is bringing charges under a provision of the Financial Institutions Reform, Recovery and Enforcement Act, a statute adopted in 1989 during the savings and loan crisis to make it easier to pursue fraud cases in the banking business. The law allows for a penalty of up to $1 million for each violation of the mail, wire and bank fraud statutes for conduct "affecting" a federally insured financial institution. The statute is designed to help the government recoup money it expended bailing out any failed bank. In this case, the government is suing over the failure of Western Federal Corporate Credit Union and other unnamed financial institutions. The statute was rarely used until recently, when the Justice Department apparently found it useful for cases arising out of the financial crisis. According to experts, the first problem the Justice Department will face is demonstrating that S&P acted inappropriately. The government will have to prove that the company’s ratings were in fact faulty, and published with the intent to deceive investors in the securities.
