| NEW YORK
NEW YORK Nov 21 The U.S. Securities and
Exchange Commission on Monday took a former Standard & Poor's
executive to trial over claims that she engaged in a fraud that
inflated ratings of commercial mortgage-backed securities.
At the start of an administrative trial in Manhattan, SEC
lawyer Stephen McKenna said Barbara Duka, the former head of
S&P's commercial mortgage-backed securities group, failed to
disclose to investors a change she made in 2011 in how her team
She instituted that change, he said, after S&P lost market
share following the 2008 financial crisis for rating newly
issued commercial-backed securities due to what Duka in an email
said was its "more conservative criteria."
To generate more business, Duka switched to ratings criteria
that were friendlier to issuers, McKenna said. That change went
undisclosed to investors, who believed S&P's ratings remained
conservative, he said.
"Ms. Duka kept these investors in the dark about this
change," McKenna said in his opening statement.
Guy Petrillo, Duka's lawyer, countered that while some
mistakes within S&P might have occurred, Duka never had any
intention of defrauding investors. Her group generated "fair and
accurate" ratings for the mortgage bonds, he said.
"This case has no merit whatsoever," Petrillo told SEC
Administrative Law Judge James Grimes.
The SEC filed its administrative case against Duka in 2015
as the regulator and two state attorneys general announced a $77
million settlement with S&P, then a unit of McGraw Hill
Financial Inc and now part of S&P Global Inc.
The case came after Goldman Sachs Group Inc and
Citigroup Inc were forced in 2011 to pull a $1.5 billion
commercial mortgage-backed securities offering after S&P
informed them of an internal review of its ratings.
Before being charged, Duka filed a lawsuit against the SEC
challenging its authority to pursue enforcement cases in-house,
rather than in federal court.
The case was one of several where defendants objected to the
SEC's use of in-house courts, saying the appointment of the
presiding judges and hurdles that can make it impossible for the
president to remove them are unconstitutional.
U.S. District Judge Richard Berman last year issued an order
blocking the SEC from moving forward with its case. But a
federal appeals court vacated that injunction in
The SEC is seeking financial penalties as well as a bar on
Duka associating with a ratings organization.
(Reporting by Nate Raymond in New York; Editing by Lisa Von