AN ITALIAN PROSECUTOR has filed charges of market manipulation against Standard & Poor’s and Fitch ratings agencies today over downgrades of Italy’s credit rating that helped fuel the euro debt crisis.
Following a two-year investigation, prosecutor Michele Ruggiero requested charges against seven people at two of the world’s top three ratings agencies.
Five of the accused worked at S&P’s, while the other two worked at Fitch at the time.
The agencies “intentionally provided financial markets with biased and distorted information,” the prosecutor’s office said in a statement.
It is a landmark case since rating agencies came under concentrated attack, particularly from governments as the eurozone crises intensified.
Those charged are accused of setting out to “destabilise Italy’s image, prestige and credit confidence on the financial markets, alter the value of Italian bonds by depreciating them (and) weaken the euro,” the statement said.
Among those charged are Deven Sharma, the head of S&P’s from 2007 and 2011, and the operational director for Fitch, David Riley.
The charges have to be confirmed by a judge for any trial to go ahead – a process which could take months under the Italian judicial system.
The ratings agencies have cooperated with the inquiry but insist their economic evaluations were independent and based on objective factors.
“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,” S&P’s said in a statement.
“We will continue to perform our role without fear or favor,” it said.
Case is one of the first of its kind
The probe began in 2010 after an Italian consumer group lodged a complaint over a sovereign downgrade by Moody’s, the other top world rating agency, which has since been cleared by investigators and is no longer part of the case.
Investigators have since focused on more recent rating actions, particularly last year when market turmoil pushed Italy to the brink of bankruptcy.
The case is being seen as one of the first of its kind on sovereign ratings.
Standard & Poor’s earlier this month lost a landmark case in Australia in the first trial of its kind over top-flight ratings given to financial products that collapsed in the build-up to the 2008 global economic crisis.
Dozens of cases have been brought around the world against rating agencies – which were widely criticised for overly optimistic assessments of financial products that turned out to be toxic – but few trials have gone ahead.
The wide-ranging probe has included high-profile raids by financial police on the Italian offices of Fitch and Standard & Poor’s in Milan, as well as the seizure of internal emails and tapping of phone conversations between analysts.
Ruggiero has said the ratings unjustifiably put Italy in the same category as more troubled eurozone economies even though official data was not as bad.
Investigators in January 2011 interviewed Mario Draghi, who was governor of the Italian central bank at the time and now heads the European Central Bank.
Draghi told investigators that ratings agencies were “highly lacking”.
The investigation has been led by the prosecutor’s office in Trani, a provincial city in the southern Apulia region. Italian law allows prosecutors to open inquiries even if the alleged crimes are not committed in their region.
Even if a trial goes ahead, the case is expected to remain largely symbolic as the suspects are all outside Italy. But it has gathered wide resonance in a country where many feel unfairly treated by the financial markets.
It has also attracted international interest and the FBI has obtained from Italian prosecutors the 8,000 pages of investigative documents for the US justice department which is investigating S&P’s in a separate case.
Italy’s Association for Clients of Banking and Financial Services (Adusbef), which formulated the original accusations, is planning a class action lawsuit against the agencies together with another consumer group, Federconsumatori.
The damages estimated by the consumers groups are €120 billion – the equivalent of the austerity packages Italy adopted after investor confidence started spiralling down and borrowing costs shot up.
Ratings agencies “have manipulated the sovereign debt market for years,” Elio Lannutti, a senator and the head of Adusbef, alleged in remarks to AFP.