SEC May Sanction S&P Over Ratings

NEW YORK (TheStreet) -- McGraw-Hill Co.(MHP), parent of bond ratings agency Standard & Poor's, may face penalties from the Securities and Exchange Commission related to a complex debt security S&P rated in 2007.

McGraw-Hill received what is called a Wells Notice from the SEC's staff indicating it is considering recommending sanctions against S&P, alleging violations of federal securities laws in its rating of the security, known as Delphinius CDO 2007-1. The punishment could involve fines and penalties, according to a regulatory filing made by McGraw Hill Monday.

Bond ratings agencies S&P, Moody's Investors Service(MCO) and Fitch played an important role in bringing about the 2008 financial crisis by assigning overly-rosy ratings to debt securities such as Delphinus that later dropped precipitously in value and creditworthiness as the housing market collapse.

The report of the Financial Crisis Inquiry Commission delivered to President Obama in January, which concluded that "the failures of credit rating agencies were essential cogs in the wheel of financial destruction."

While six slices of Delphinius received a triple-A rating from S&P in August 2007, they were all rated as junk by the end of 2008, according to Bloomberg, which cited an April report from the Permanent Subcommittee on Investigations.

Earlier this month, McGraw Hill announced plans to separate into two public companies--one focused on education publishing and the other concentrating on financial markets. The transaction is expected to take effect at the end of 2012.

-- Written by Dan Freed in New York.

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