The Wall Street Journal reported that the Securities Exchange Commission (SEC) notified Standard and Poor’s Rating Services (S&P) that it could face an enforcement action for alleged securities fraud regarding six commercial real-estate securities deals in 2011. It was not immediately clear which six 2011 real estate deals are in question; however, around that time, S&P faced intense backlash from investors and issuers when it took the unprecedented step of pulling a preliminary rating on a $1.5-billion CMBS offering. By withdrawing the rating, issuers Goldman Sachs and Citigroup lost millions, and issuers looked to other firms for ratings thereafter. Despite subsequently replacing management, S&P never really recovered from the debacle.
The SEC notice comes at a difficult time for the firm that was once a dominant participant in the CMBS ratings market. On Friday, July 17, the firm cut its CMBS staff 33%, reflecting its reduced presence in rating recent CMBS transactions. The firm is also defending itself against a $5-billion lawsuit related to pre-crash residential MBS deals that soured. These legal matters could likely cause CMBS issuers to continue to bypass S&P on deals, particularly with other ratings options from Morningstar and DBRS that entered the market after 2010 providing more rating options for issuers.
Some industry veterans believe S&P can rebuild itself. The firm remains active in rating single-borrower CMBS transactions that could lead to another restructuring of the CMBS operations.
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