S&P under investigation over US downgrade

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Published time: August 12, 2011 15:38
Edited time: August 12, 2011 19:38

Following a series of attacks from filmmaker Michael Moore and Senator Al Franken, the US Securities and Exchange Commission is now investigating allegations of illegal practices from within the wall of Standard & Poor’s.

A week after downgrading the United States’ credit rating, Standard and Poor’s is now facing scrutiny from the SEC over allegations that S&P’s employees conducted insider trading before the US debt downgrade was officially announced.

On Monday, Michael Moore tweeted that President Barack Obama should “show some guts” and arrest the CEO of S&P, writing that “these criminals brought down the economy in 2008” and warning that they “will do it again.” That same day, Sen. Al Franken (D-Minn.) gave an interview to The National Memo in which he said that misconduct happening within the ratings agencies served as a catalyst for the catastrophe that came following S&P’s downgrade of the US debt.

Now it looks like Obama might have listened to them, as the SEC is now investigating if members of S&P received prior knowledge of the downgrade before it was published to the public last Friday, allowing them to participate in financial transactions before what turned out to be a week of bizarre market fluctuations. As part of their probe, the SEC is asking to see a list of S&P employees who were made aware of the downgrade before it happened.

Should the SEC determine that Standard and Poor’s officials were given notice of the downgrade ahead of time, it would still be difficult for them to prove that they conducted illegal insider trading, reports The Financial Times. Given threats of a downgrade during the weeks prior, many on Wall Street were anticipating a downgrade whether or not Congress could reach a decision of the debt ceiling by last Tuesday’s deadline.

Should the SEC find evidence of wrongdoing among members of S&P, the credit rating agency could stand to face serious repercussions. The Credit Rating Agency Reform Act of 2006 states that an agency faces revocation of its license if it leaks information about a downgrade decision before it is made available to the public. Furthermore, an agency, such as S&P, must have policies and procedures set to prevent a disclosure from happening. S&P, however, fire back that an 18-page section of its code of conduct clearly outlines such policies, which makes it illegal for its employees to trade what they rate.

On Monday of this week, the Senate Banking Committee revealed that they were beginning an investigation of their own regarding the debt downgrade.