S&P must fight off lawsuit over CDO rating

Standard and Poor's (S&P) has revealed it has received notice from the Securities and Exchange Commission (SEC) recommending a lawsuit be brought against it over a mortgage-backed security it rated in 2007.

The ratings agency could be hit with a fine and lose any fees it made from the rating action on a collateralised debt obligation (CDO) called 'Delphinus CDO 2007-1'.

The Wells Notice from the US regulator gives S&P the opportunity to convince the SEC why a lawsuit should not be brought, the Telegraph reports.

CDOs - bonds made up of mortgages of varying quality - were popular before the financial crisis because of high yields and perceived low risks, but have since come under scrutiny from the authorities.

Ratings agencies such as S&P and Moody's have been accused of awarding some CDOs higher ratings than they deserved because they were paid to rate the debt instruments by banks selling them.