S&P Put on Notice

McGraw-Hill (NYSE:MHP), the owner of Standard and Poors Ratings Services, acknowledged Monday morning that it received a Wells Notice from the Securities and Exchange Commission last week.

The notice, according to McGraw-Hill, is a warning from the SEC that it may institute a civil injunctive action against Standard & Poors Ratings Services (S&P), alleging violations of federal securities laws with respect to S&Ps ratings for a particular 2007 offering of collateralized debt obligations, known as Delphinus CDO 2007-1.

Delphinus CDO 2007-1 was a $1.6 billion CDO cited in the Levin Report on Wall Street and the Financial Crisis as an example of what went wrong in the years leading up to the financial economic collapse. Moodys received a Wells Notice from the SEC on an unrelated matter in 2010.

The report is highly critical of the failed ratings given CDOs by firms like S&P. Delphinus was downgraded a few months after its rating was issued. Moodys gave AAA ratings to seven of its tranches and S&P to six tranches in July and August 2007, respectively, but began downgrading its securities by the end of the year and by the end of 2008, had fully downgraded its AAA rated securities to junk status, the report stated.

The Levin report blamed the inaccurate credit ratings assigned by Moodys and S&P on pressure from investment banks to inflate ratings, inaccurate rating models, and inadequate rating and surveillance resources. The report indirectly accuses the ratings agencies of committing fraud, It was not in the short term economic self-interest of either Moodys or S&P to provide accurate credit risk ratings for high risk RMBS and CDO securities.

A press release issued by McGraw-Hill says, S&P has been cooperating with the Commission in this matter and intends to continue to do so.