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S&P wants to split up $5 billion U.S. ratings lawsuit

A man walks past the Standard & Poor's building in New York's financial district February 5, 2013. REUTERS/Brendan McDermid
A man walks past the Standard & Poor's building in New York's financial district February 5, 2013. REUTERS/Brendan McDermid

By Jonathan Stempel

(Reuters) - Standard & Poor's asked a federal judge to split up the U.S. government's $5 billion civil fraud lawsuit accusing it of lying about its credit ratings, saying it would be unfair to have to defend against a case of such "unmanageable scope" all at once.

In a court filing on Tuesday, the McGraw Hill Financial Inc unit proposed holding a trial in two phases, with the first focusing on just the 17 securities where Citigroup Inc is alleged to have suffered losses.

S&P said this would cover over 30 percent of alleged losses suffered by financial institutions on the 158 securities in the February 2013 lawsuit, and limit the risk of juror confusion.

In contrast, a single trial would force jurors to balance government claims that S&P's ratings lacked "independence" and "objectivity" against "an overwhelming amount of information regarding the actual securities at issue and the detailed process by which S&P determined its ratings," S&P said.

"The government's proposed case benefits only one party: the government," it added.

U.S. District Judge David Carter in Santa Ana, California is expected at an April 14 hearing to consider S&P's request to split the trial, which is now scheduled for September 2015.

A spokeswoman for the U.S. Department of Justice declined to comment on S&P's request.

The lawsuit is one of several cases where the government has recently used the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), passed after the 1980s savings and loan scandal and carrying a 10-year statute of limitations, to address alleged misconduct causing the 2008 financial crisis.

In the lawsuit, the government accused S&P of hurting banks and credit unions by inflating ratings to win more fees from issuers, and being too slow to downgrade debt backed by souring mortgage-backed securities.

Jeffrey Manns, an associate professor at George Washington University Law School, said S&P's tactics may be a "clever hedging strategy" in which the results of an initial trial could prompt either side to try to settle for well under $5 billion.

He also said: "S&P may be engaging in cherry picking, by focusing on what it may consider the weaker part of the government case, and denying the government a landmark verdict. This lawsuit is a test case about the contours of FIRREA. If the government loses the first part, then it may not have a foot to stand on in the rest of this case, or in similar cases."

S&P has complained that the government sued in retaliation for its 2011 decision to strip the United States of its "triple-A" rating, a downgrade that it said was prompted by concern about Washington's ability to manage the country's debt.

U.S. officials have said there was no connection between the lawsuit and the downgrade, and that the downgrade was based on a $2 trillion math error by S&P. The government did not sue S&P's main rivals, Moody's Investors Service and Fitch Ratings.

The case is U.S. v. McGraw-Hill Cos et al, U.S. District Court, Central District of California, No. 13-00779.

(Reporting by Jonathan Stempel; Editing by Bernard Orr)

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