S&P Under Review for Possible Violations Over Credit Downgrade
The Securities and Exchange Commission (SEC) is investigating the possibility of insider trading at Standard & Poor’s (S&P) and whether employees may have traded ahead of the U.S. credit downgrade and personally profited from the transaction.
S&P has been asked by the SEC to disclose a list of all employees who had knowledge of the downgrade prior to it being made public last week. If in fact someone did act on the information ahead of its official release, they could face several civil and criminal charges. If proven, S&P could also face severe repercussions.
A little-known law passed in 2006, called the Credit Rating Agency Reform Act, states that a credit rating agency could have its license registration revoked if it leaked information about a pending decision to downgrade before making the information publicly available.
Get Our Latest News for FREE
“If it is true that they told hedge funds and briefed banks and told a few people ahead of everyone else that would appear to be a clear violation of the 2006 Act,” Barbara Roper of the Consumer Federation of America told Marketwatch. “Credit rating agencies have to have policies to prevent the dissemination of pending rating action on the internet.”
Neither the SEC nor the Treasury Department would comment on the matter, saying their policy is not to discuss pending or ongoing investigations.
A spokesperson with S&P said the company has politics and procedures designed to “bring about compliance with applicable regulatory requirements as well as to direct the appropriate handling, use and protection of confidential information.”
Former SEC enforcement attorney and now a partner at Shulman Rogers Gandal Porty & Ecker, Jacob Frenkel, told Marketwatch that the SEC should also look and see if any U.S. government official had knowledge of the pending downgrade and might have traded or passed along the confidential information to others in exchange for financial benefit.
"If information about a credit rating action did get out from the rating agency then, at minimum, it raises questions about whether that rater had adequate compliance controls and procedures in place as required under the securities laws,” said Frenkel.
The Obama administration has asserted that S&P was negligent in their actions and said they discovered a $2 trillion error in S&P’s analysis over a 10-year period. The Senate Banking Committee is planning on looking into the downgrade, according to sources close to the committee. S&P officials will likely be called to testify before the committee as they seek to undercover more details about the firm’s processes in making their final decision.
U.S. Stocks suffered their worst losses Monday since December of 2008 as investors reacted to the news of the U.S. government’s rating moving from AAA to AA+. As of mid-day Friday, the Dow Jones Industrial Average had recovered much of its losses for the week.
