McGraw-Hill credit branch accused of fraud
Photo by: Nick Conley
The United States Department of Justice accused McGraw-Hill Cos. unit of credit rating fraud last week.
The company in question is Standard & Poor's, the world’s largest credit-ratings company, according to Bloomberg. McGraw-Hill reported highest sales at S&P in the past several years but claimed net losses in its education unit.
Bloomberg data reported McGraw-Hill claimed a 22 percent increase in revenue of its financial operations in the fourth quarter, resulting in a $1.23 billion quarter. Meanwhile, the company posted net losses of more than $216 million, claiming the unit as a discontinued operation in the pending sale to Apollo Global Management LLC.
Kevin McCoy of USA Today said in an article on the case that the loss is the result of a $497 million charge McGraw-Hill took during the sale of S&P.
McCoy said government lawyers, who allegedly found the company guilty of defrauding investors by falsely inflating credit ratings, investigated S&P. Lawyers copied internal emails and messages supporting their claims, tying S&P’s falsely inflated bonds to instable mortgages.
A spokesperson for McGraw-Hill said the lawyers “cherry picked” the selected messages which does not reflect the correct actions.
"Claims that S&P deliberately kept ratings high when it knew they should be lower are simply not true, as an objective assessment of the evidence will prove," a spokesperson said in the USA Today article.
Philip Patterson, Distinguished Professor of Mass Communication at Oklahoma Christian University, said because McGraw-Hill owned S&P at the time of the scam, they will be held hugely liable.
“What Standard and Poor’s did that got them in trouble is that they put “good” ratings on mortgages that turned out to be less than dependable,” Patterson said. “[S&P is] a huge target to sue, so the Department of Justice (the government who took a real beating on government-backed mortgages) is suing on behalf of tons of lenders who owed tons of bad mortgages.”
Patterson said S&P might not be the only one in the wrong.
“Whose to blame?” Patterson said. “Probably the economy, but you can’t sue the economy. You can only sue the banks for masking the fact that these were bad loans and the credit rating company (Standard and Poor’s) that gave the investment banks a thumbs up on buying them mortgage.”
Patterson is scheduled to print the eighth edition of his textbook “Media Ethics: Issues & Cases” in March with McGraw-Hill, but said the company was up front with authors and the lawsuit should not affect him.
According to Kenneth Vittor, a chief counsel for McGraw-Hill, the U.S. government is seeking more than $5 billion in penalties against the company. Vittor said in the Bloomberg interview that the current available specifics account for about $500 million in charges.
“We intend to defend the company vigorously,” Vittor said.
In an article from Reuters, Vittor said the case against McGraw-Hill is flawed. He said S&P earned less than $15 million from the CDOs (collateralized debt obligation) mentioned in the case, and the case ignored the fact that the company received nearly identical credit ratings from other agencies.
Reuters reporter Jochelle Mendonca said McGraw-Hill has a successful defense record in similar lawsuits.
“The company does not believe the Department of Justice can prove that this failure… was the product of intentional misconduct by anyone at S&P,” a spokesperson for McGraw-Hill said in Mendonca’s article.
The company said Feb. 12 that it expects adjusted earnings of $3.10 to $3.20 per share for McGraw-Hill Financial and single-digit percentage increase in revenue for S&P’s unit in 2013.
"The results and outlook were outstanding," Benchmark Co. analyst Edward Atorino said in the Reuters article. "McGraw Hill is in a great fundamental position. We'll see if the Justice Department's case can stick, but that will take a couple of years."