Italian Prosecutor Takes Credit Agencies To Task For Alleged Market Manipulation During 2011 Sovereign Downgrade

Two employees at Paris-based Fitch Ratings and five at New York-headquartered Standard & Poor’s are being accused of market manipulation and abuse of privileged information by the public magistrate in the southern Italian town of Trani, as a result of an investigation stemming from those agencies downgrade of Italian debt last year. The court official had originally intended to charge officials at Moody’s Investors’ Service, the other large global credit rating firm, but declined for unexplained reasons.

"The agencies for which we seek trial did not respect the rules of transparency, loyalty and the parameters of quality and efficiency set by European regulators," Trani chief prosecutor Carlo Maria Capristo told a news conference, according to Reuters.

The jurist is specifically alleging people at those organizations had nefarious interests when leaking information on impending downgrades during market hours, something that caused panic and steep losses among investors. He is also questioning why the agencies waited three days after announcing the downgrades to officially release the reports explaining their rationale.

"Communicating in this uneven way generated volatility and uncertainty on markets, causing considerable losses on stock, bond and sovereign debt markets," the prosecutor said Monday, according to The Wall Street Journal.

"These claims are entirely baseless and without any merit as our role is to publish independent opinions about creditworthiness according to our public and transparent methodologies, which we apply consistently around the world," S&P said in an emailed statement on Monday.

The agencies in legal hot water were not the only ones critical of the prosecutor’s action, which many see as a political maneuver meant to stoke populist passions within an increasingly more fractious Italian political establishment. Judges in Rome and Milan have already thrown out similar cases brought against the ratings agencies in the past.

At the same time, it appears in Italy and elsewhere the tide is turning against the privileged legal status usually enjoyed by the credit rating agencies, who generally use the excuse that they only provide advice to avoid legal liability for the eventual effects their ratings have on investments.

Last week, a court in Australia held S&P liable for millions lost by investors after it found the agency had been incompetent and possibly corrupt in its decision to give highly-risky mortgage-backed securities its highest rating.

Back in Italy, prosecutor Capistro noted "critics have compared us to a little town in Oklahoma” in dismissing the seriousness of his actions “but we respond with facts and by applying the law.”

It’s still to be seen what the winds now sweeping down the plain will do to the credit rating agencies.