By Jenna Greene and Scott Flaherty, From The National Law Journal

One big settlement, but more claims are pending.

If Standard & Poor’s Rating Services were to grade its own legal risk, it might give itself a BB: “Faces major ongoing uncertainties.”

Last week, the company paid nearly $80 million to settle charges by the U.S. Securities and Exchange Commission and state regulators that it misled investors by issuing inflated ratings, but its legal woes are far from over.

S&P faces a $5 billion suit by the Justice Department, another by more than a dozen states and the District of Columbia, and actions by investors alleging they were duped by the company’s structured finance ratings.

On Jan. 21, S&P agreed pay $58 million to the SEC, plus $12 million to settle charges by the New York attorney general’s office and $7 million to the Massachusetts attorney general’s office.

In a first for the SEC, the penalty also requires S&P to take a one year “time out” from rating certain commercial mortgage-backed securities — punishment that Enforcement Division head Andrew Ceresney called “creative relief that hits wrongdoers directly where it hurts.”

According to the SEC, the company, which was represented by Davis Polk & Wardwell partner Angela Burgess (left), loosened its ratings criteria for “conduit fusion” commercial mortgage-backed securities to obtain business, then hid the changes from investors.

In a conference call with reporters, Ceresney blasted S&P for its “egregious behavior” and “deep cultural failure,” noting that the “intentional fraud” took place in 2011 and 2012. “It’s a reminder that race-to-bottom behavior … persists even though the [financial] crisis had ended,” he said.

The series of actions — the first by the SEC against a major ratings firms — were brought administratively, rather than in federal court.

The SEC also brought an administrative case against Barbara Duka, the former head of S&P’s commercial mortgage-backed securities group. That case is pending, and Duka has filed a challenge in New York federal court objecting to the administrative forum. An investigation by The National Law Journal found that the SEC won each of its last 219 administrative cases.

The $77 million settlement appears to be larger than S&P expected. In October, parent company McGraw Hill Financial Inc. set aside $60 million to cover legal costs, although it cautioned that there “can be no assurance that this amount will be sufficient to resolve these matters.”

In a Jan. 21 statement, the company said it “is pleased to have concluded these matters. It takes compliance with regulatory obligations very seriously and continues to make investments in people and technology to strengthen its controls and risk management throughout the organization.”

FORMIDABLE CHALLENGE

The deal clears away one piece of financial crisis fallout for S&P, but a more formidable suit remains. In a separate action, the U.S. Department of Justice sued McGraw Hill and S&P in February 2013 in Los Angeles federal court, seeking as much as $5 billion in penalties.

The DOJ alleged S&P defrauded investors in residential mortgage-backed securities and collateralized debt obligations that tanked in value amid the subprime crisis. The DOJ’s suit maintains that S&P inflated its ratings, misrepresenting the real risks associated with the securities.

Cahill Gordon & Reindel; Keker and Van Nest; and Keller Rackauckas are defending S&P in the suit, arguing that the company was singled out for prosecution in retaliation for downgrading U.S. debt in 2011. In September, S&P won a court order requiring former Treasury Secretary Timothy Geithner to turn over unredacted documents that he used in writing his memoir, Stress Test: Reflections on Financial Crises.

Multiple news organizations have reported the case is near settling for between $1 billion and $1.5 billion.

Beyond the federal action, S&P faces claims over its residential mortgage-backed securities ratings brought by 16 states and the District of Columbia. McGraw Hill initially convinced a federal judicial panel to consolidate those cases in New York federal court, but U.S. District Judge Jesse Furman overturned the consolidation, ruling in June that the cases belonged in their respective state courts.

The various state A.G. cases remain active, according to the Connecticut attorney general’s office, which was the first to file suit and has taken a lead role in coordinating the states’ joint efforts.

Most recently, S&P failed to fend off a consumer fraud suit by the state of New Jersey that accuses it of misleading consumers about the independence and objectivity of its ratings services. The company’s motion to dismiss that case for failure to state a claim and lack of personal jurisdiction was denied by Judge David Katz of Essex County Superior Court in an opinion released on Jan. 6.

S&P has also faced suits by investors who claim to have been misled by its ratings. S&P counsel led by Cahill Gordon’s Floyd Abrams have enjoyed considerable success defeating such claims on First Amendment grounds, arguing that the company’s ratings amount to constitutionally protected “opinions.” But that defense hasn’t always been enough to escape investor claims.

In April 2013, for example, S&P along with Moody’s Investors Service and Morgan Stanley paid about $75 million each — $225 million total — to settle investor suits for inflated ratings, according to the Wall Street Journal.

IMAGE: Standard & Poors BELEAGUERED: Sixteen states and the District of Columbia have claims pending. NYLJ/Monika Kozak

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