The Securities and Exchange Commission faces hurdles proving wrongdoing at credit-rating agencies, the agency's enforcement chief said, pointing to the complexity of the cases and the industry's strong legal defenses.

SEC Enforcement Director Robert Khuzami's comments to Reuters came a day after McGraw-Hill Cos Inc disclosed on Monday that the agency may sue its Standard & Poor's unit for breaking securities laws.

Khuzami declined to comment specifically on S&P, but his remarks show how a case against S&P or other credit raters would be far from easy to win.

There are some statutory challenges in the law, and some disclosure-related challenges that are unique to credit-rating agencies that can make the cases more challenging, Khuzami said.

But, we don't let that stop us from investigating possible misconduct, Khuzami added. We are looking hard at them.

The SEC's investigation into S&P may lead to the first charges against a major credit-rating company for its grading of complex structured products during the financial crisis.

Khuzami's descriptions of the challenges he faces come as financial and legal experts puzzle over why the SEC has taken a step against only S&P when Moody's Investors Service and Fimalac SA's Fitch Ratings also gave the same bonds their highest grades just months before they were marked down to junk.

I just don't get why S&P is being singled out here, said Janet Tavakoli, a structured finance consultant. I don't see much difference between the ratings from the three agencies.

Khuzami said there can be many reasons why law enforcers go after one firm and not another.

Without commenting specifically on the S&P matter, he said that different actors might analyze a product in different ways, or one may know things that another does not.

It can also just be a simple issue of timing, he said, noting that cases against similarly-situated parties do not always move at the same pace.

It is the painstaking job to build cases involving complex transactions or products, he said. You look at individual emails, individual pieces of testimony, and piece together a circumstantial case, arguing that the most reasonable inference from the evidence is that the defendant knew X and said Y, and did it with wrongful intent.

In fact, some legal experts believe that the SEC may be singling out S&P over other raters specifically because of an email trail that it left behind in the crisis, even though other ratings firms may have behaved similarly.

Some emails, which were unearthed by U.S. Senate investigators, reveal that analysts at S&P had doubts about the agency's ratings for bonds issued by a collateralized debt obligation known as Delphinus CDO 2007-1. That CDO is now at the center of the SEC probe of S&P.

Some of the contents of the CDO, a portfolio of mortgage securities that were bundled into bonds, were swapped at the eleventh hour, meaning that analysts weren't ultimately rating the bonds they thought they were.

You can take a look and see if it is different from the closing date portfolio you received from the banker, S&P's Lois Cheng wrote to colleague Lauren Sprinkle in the first of a series of exchanges made public at an April 23, 2010, hearing by an investigative panel headed by U.S. Senator Carl Levin.

In the eighth email in the set, Sprinkle copied in more senior members of the team and said it appeared that about 25 assets in the portfolio were dummies which had been replaced at the last minute with assets that would have made the portfolio worse... and they would have not been able to close.

The emails were dated August 20, 2007 - just 18 days after S&P had published its ratings on the deal. After that, S&P did not downgrade any of its Delphinus ratings for four months, according to an exhibit at Levin's hearing.

A McGraw-Hill spokeswoman declined to comment.

Levin's committee introduced no Moody's emails mentioning the Delphinus CDO, except for one from an investment banker to Moody's requesting that the agency assign a more experienced analyst to his next deal. Fitch Ratings was not examined by the committee.

Levin's panel ultimately issued a scathing report in April this year that condemned S&P and Moody's for helping trigger the financial crisis. The report was referred for review to the SEC and Department of Justice.


For the past several years, the SEC has faced pressure to find a way to bring charges against the credit-rating agencies for their role in the crisis.

The task has proved exceedingly difficult.

For example, Khuzami said, certain kinds of conduct by the raters could only be addressed starting in September 2007. That was the effective date of a 2006 law that formally granted the SEC full-scale regulatory authority over raters.

In addition, the 2006 law expressly prohibits the SEC from regulating the substance of ratings. Some have asserted that this provision helped shield credit-rating agencies from enforcement actions involving how ratings are determined.

It was not until last year when the Dodd-Frank law was enacted that Congress strengthened the SEC's authority by clarifying that raters cannot assert that excuse as a defense in civil fraud actions, Khuzami said.

Even with the Dodd-Frank changes, however, credit raters have long maintained that that their ratings constitute opinions which are protected as free speech under the First Amendment to the U.S. Constitution. That defense has historically shielded the agencies from lawsuits by investors who challenged their ratings, saying they lost money by relying on them.

Although Moody's and Fitch have yet to indicate they may face any charges in connection with the financial crisis, experts say it is possible SEC enforcers could still go after them.

It may be a case where they are staging their approach and they intend to go after the other two as well, said Daniel Drosman, a law partner at Robbins Geller Rudman & Dowd, which is suing S&P and Moody's to recover money investors lost buying top-rated bonds.

For his part, Khuzami said the SEC will continue to vigorously pursue any wrongdoing among credit rating agencies. He also said the SEC is moving forward on cases related to other financial firms who played a role in the recent credit crisis.

It is clear that credit crisis cases remain a priority, he said. There are others that will be coming.

(Reporting by Sarah N. Lynch and Andrea Shalal-Esa in Washington and David Henry and Jonathan Stempel in New York; Editing by Tim Dobbyn)