(CN) - A shareholder derivative action says McGraw Hill Financial's board members should be held responsible for Standard & Poor's credit rating misrepresentations which have so far cost it $1.67 billion.
L.A. Grika filed a derivative suit on behalf of McGraw Hill Financial against Chairman Harold McGraw III and 10 members of the board.
McGraw Hill owns the credit-rating agency Standard & Poor's, which the government accused of defrauding investors by misrepresenting its ratings as objective.
In fact, Standard & Poor's desire to expand its market share induced it to issue higher credit ratings to client's securities than they deserved.
These misrepresentations substantially contributed to the 2008 financial crisis in that investors were unaware of the true risk of many residential mortgage-backed securities due to their inflated credit rating.
Standard & Poor's paid $1.375 billion to settle the Justice Department's lawsuit, $58 million to the Securities and Exchange Commission, and $19 million to settle various state lawsuits.
Then-Attorney General Eric Holder said of the settlement, "As S&P admits, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company's business. While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression."
The credit rating agency recently reached a $125 million settlement in a private lawsuit brought by California's pension system, and many claims remain outstanding.
Grika claims that executives at Standard & Poor's parent, McGraw Hill, should be held responsible for the agency's "reckless pursuit" of customer satisfaction.
"Notwithstanding the massive amount of damages incurred by the company as a result of the individual defendants' wrongdoing, McGraw Hill has not sought to hold any of its (or S&P's) officers or members of its board financially accountable for the payments made in connection with either the settlement of the DOJ action, or the SEC and/or any of the parallel proceedings," Grika says in the complaint.
Grika continues: "The company's board of directors has not acted despite the fact that throughout the relevant period, defendant Harold McGraw III took personal credit for the profitability and growth of the business of McGraw Hill, which was primarily driven by the reported and artificially inflated financial results at S&P, thereby enabling him to receive, unjustifiably, tens of millions of dollars in bonus payments."
McGraw received more than $98.5 million in salary, bonus, and equity compensation from 2004 to 2013.
Grika seeks restitution from board members of money paid to settle with the DOJ and SEC, plus disgorgement of all unjustly received compensation and benefits.
She also demands that McGraw Hill's directors allow shareholders to vote on proposals to strengthen supervision of operations, and for greater shareholder input into supervisory policies.
Grika is represented by Benjamin Kaufman with Wolf, Haldenstein, Adler, Freeman & Herz, and Richard Greenfield with Greenfield & Goodman in New York.
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