Professor Alan Palmiter quoted by Reuters regarding possible action against S&P for securities violations

Sept 26 (Reuters) – U.S. regulators disclosed they may take action against Standard & Poor’s for securities law violations after the ratings agency gave top grades to a package of securitized mortgages in 2007 that quickly soured.

The possible action could be the first by the United States against one of the major credit rating agencies, which have been accused of enabling the lending excesses that led to the subprime mortgage crisis in 2008.

The disclosure follows S&P’s downgrade of the debt of the U.S. government in August, an unrelated move that was not followed by other rating agencies and that drew darts from the Obama administration and a bipartisan group of politicians.

The disclosure came in a statement Monday from McGraw-Hill Cos Inc (MHP.N), parent company to Standard & Poor’s, which said it had received a Wells notice from the U.S. Securities and Exchange Commission on Sept. 22.

Wells notices give potential defendants an opportunity to explain why civil charges should not be brought. The company said SEC staff are considering recommending that commissioners take action against S&P for violating securities laws in its ratings of a 2007 collaterized debt obligation known as “Delphinus CDO 2007-1.”

While Wells notices are not always followed by lawsuits from the SEC, they represent a serious threat. “A Wells notice ups the ante,” said Alan Palmiter, professor, Wake Forest University School of Law, Winston-Salem, North Carolina. “It is clear the SEC has identified something it sees as a problem with ratings issued during the subprime mortgage heyday.”

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