The Obama administration has accused Standard & Poor's credit rating agency of refusing to warn investors that the housing market was collapsing in 2006 because it would be bad for business.
The civil charges were the administration's most aggressive action to date against those deemed responsible for contributing to the worst financial crisis since the Great Depression. They followed years of criticism that the US government had failed to do enough.
The US Justice Department accused S&P of knowingly inflating its ratings of risky mortgage investments that helped trigger the crisis. It's demanding US$5 billion in penalties.
According to the lawsuit, S&P gave high marks to the investments because it wanted to earn more business from the banks that issued them.
"This alleged conduct is egregious - and it goes to the very heart of the recent financial crisis," Attorney General Eric Holder said.
Experts said the lawsuit could serve as a template for future action against Fitch and Moody's, the other two major credit rating agencies.
High ratings from the three agencies made it possible for banks to sell trillions in risky investments. Some investors, including pension funds, can buy only securities that carry high credit ratings.
S&P, a unit of New York-based McGraw-Hill Cos, called the lawsuit "meritless."
"Hindsight is no basis to take legal action against the good-faith opinions of professionals," the company said in a statement. "Claims that we deliberately kept ratings high when we knew they should be lower are simply not true."
According to the lawsuit, S&P recognized that home prices were sinking and that borrowers were having trouble repaying loans. Yet these facts weren't reflected in the safe ratings S&P gave to complex real-estate investments known as mortgage-backed securities and collateralized debt obligations, the lawsuit alleges.
At least one S&P executive who had raised concerns about the company's proposed methods for rating investments was ignored.
S&P executives expressed concern that lowering the ratings on some investments would anger the clients selling these investments and drive new business to S&P's rivals, the government claims.
Holder called the case "an important step forward in our ongoing efforts to investigate and punish the conduct that is believed to have contributed to the worst economic crisis in recent history."
