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S&P parent McGraw-Hill fires back at U.S., says case flawed

A view shows the Standard & Poor's building in New York's financial district February 5, 2013. The U.S. government is seeking more than $5 billion in a lawsuit against rating agency Standard & Poor's over mortgage bond ratings.


The parent of credit ratings agency Standard & Poor's, which was sued for $5-billion by the U.S. government last week for defrauding investors, fired back on Tuesday, saying it doesn't believe the government has a case.

McGraw-Hill Cos. Inc. said S&P has a record of successfully defending itself against suits like the one by the U.S. Department of Justice that accuses it of duping investors by presenting its ratings as objective.

"The company does not believe the Department of Justice can prove that this failure – common to nearly everyone at the time – was the product of intentional misconduct by anyone at S&P," McGraw-Hill said in a statement accompanying its quarterly results.

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McGraw-Hill General Counsel Kenneth Vittor said the suit provided specifics on only about $500-million of losses suffered by federally insured institutions, while seeking $5-billion in penalties.

S&P earned less than $15-million from the collateralized debt obligations (CDOs) named in the complaint, Vittor said in a conference call with analysts and investors.

Vittor said the complaint also ignored the fact that all the CDOs that it identified in the case received a virtually identical rating from at least one other credit agency.

CDOs are bundles of debt securities based on assets such as mortgages. Leading up to the financial crisis, many of the mortgage-backed assets included in CDOs consisted of subprime loans that later soured.

S&P has hired John Keker, one of the country's top white-collar defence attorneys, to fight the lawsuit.

The combative Keker won credit from legal experts in 2006 when Andrew Fastow, considered the mastermind of the Enron fraud, was sentenced to only six years in prison.

S&P rival Moody's Corp is also expected to be targeted in a Federal government lawsuit over the agency's pre-crisis debt ratings.

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McGraw-Hill, which is also being sued by a number of states including Connecticut and California, said it was open to discussing reasonable settlements.

Shares of the company, which have lost nearly a quarter of their value since the government launched the suit, were up about 1.3 per cent at $44.86in morning trading on the New York Stock Exchange.

McGraw-Hill's fourth-quarter profit from continuing operations jumped 76 per cent, helped by a surge in debt issuance. Income from continuing operations rose to $190-million, or 67 cents per share, from $113-million, or 37 cents per share, a year earlier.

Revenue rose 22 per cent to $1.23-billion.

Adjusted earnings per share from continuing operations amounted to 72 cents per share.

McGraw-Hill posted a net loss of $216-million during the quarter, including one-time costs related to the sale of its education unit to Apollo Global Management LLC in November.

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The company said in November it would take a non-cash impairment charge of about $450-million to $550-million in the fourth quarter to mark down the value of the unit.

It said on Tuesday it expected 2013 adjusted earnings of $3.10 to $3.20 per share for McGraw Hill Financial, which includes S&P. It said it expects high-single digit percentage growth in revenue for the unit this year.

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