— In a 2004 document, executives said they would poll investors as part of the process for choosing a rating. One executive asked, "Does this mean we are to review our proposed criteria changes with investors, issuers and investment bankers? ... (W)e NEVER poll them as to content or acceptability!" The executive's concerns were ignored, the government said.
— Also that year, an analyst complained that S&P had lost a deal because its standards for a rating were stricter than Moody's. "We need to address this now in preparation for the future deals," the analyst wrote.
The lawsuit comes just 18 months after S&P cut its rating on long-term U.S. government debt by a notch. The downgrade followed a contentious debate between the White House and Congress over the raising of the government's borrowing limit that was resolved at the last hour.
Holder was asked about a possible link between the lawsuit and the downgrade.
"There's no connection," Holder said, who added the department's investigation began in 2009.
At the news conference, acting Associate Attorney General Tony West said documents "make clear that the company regularly would 'tweak,' 'bend,' delay updating or otherwise adjust its ratings models to suit the company's business needs." He said that in 2007, S&P issued ratings it "knew were inflated at the time they issued them."
S&P countered that the emails were "cherry picked," that they were "taken out of context, are contradicted by other evidence, and do not reflect our culture, integrity or how we do business."
It said the government left out important context. For example, one email that says deals "could be structured by cows" and then rated by S&P was unrelated to the types of investments at issue in the government's lawsuit, S&P said. It said the analyst's concerns were addressed before a rating was issued.
The lawsuit alleges that S&P knew the subprime mortgage market was collapsing by 2006, yet it didn't issue a mass downgrade of subprime-backed securities until mid- 2007. The mortgages were performing so poorly "that analysts initially thought the data contained typographical errors," according to one document cited in the lawsuit.
In a 2007 email, another analyst said some at S&P wanted to downgrade mortgage investments earlier, "before this thing started blowing up. But the leadership was concerned of p(asterisk)ssing off too many clients and jumping the gun ahead of Fitch and Moody's."
The government's case sides with critics of rating agencies who have long argued that the agencies suffer from a conflict of interest. Because they're paid by the banks that create investments they're rating, the agencies had to compete for banks' business. If one agency appeared too strict, banks could shop around for a better rating.
S&P typically charged $150,000 for rating a subprime mortgage-backed security and $750,000 for certain other securities. If S&P lost the business to Fitch or Moody's, its main competitors, the analyst who issued the rating would have to submit a "lost deal" memo explaining why he or she lost the business.
The government charged S&P under a law intended to make sure banks invest safely. If S&P is found to have committed civil violations, it could face not only fines but also limits on how it does business. There are no criminal charges, which would require a higher burden of proof.
McGraw-Hill shares dropped $2.72, or 5.4 percent, to $47.58 in morning trading Tuesday after plunging nearly 14 percent on Monday after the lawsuit was first reported.
Shares of Moody's Corp., the parent of Moody's Investors Service, another rating agency, lost $1.05, or 2.2 percent, to $48.40 in morning trading Tuesday after closing down nearly 11 percent on Monday.
Christina Rexrode reported from New York. AP writers Pete Yost and Marcy Gordon in Washington and AP Business Writer Bree Fowler in New York contributed to this report.
Daniel Wagner can be reached at www.twitter.com/wagnerreports .