SEC Investigating S&P Over Leak of Downgrade to Investors

By Kim Peterson, MSN Money

12 August 11

Who leaked the S&P downgrade news? Wall Street was given plenty of warning, and now the SEC may be looking into who knew what and when.

tandard & Poor's downgraded the US credit rating late last Friday, and the news wasn't much of a surprise. Wall Street had heard a rumor early on that the downgrade was coming. News sites reported the rumor all day.

Unless it was all a huge coincidence, it's likely that someone in the know leaked the information. The questions are who and whether the leak led to early insider trading.

That's what the Securities and Exchange Commission is reportedly investigating. The SEC has asked Standard & Poor's to disclose who exactly knew about the downgrade before it was announced, the Financial Times reports. It's the start of a preliminary look into potential insider trading.

It will be a tough nut to crack. It's one thing to ask who knew the downgrade would take place. It's entirely a different beast to figure out where the information went from there - and then to find out whether any improper insider trading was committed based on the information.

There's a very real consequence at stake. A 2006 law says a credit ratings firm like S&P could have its license revoked if it did leak information about the downgrade, MarketWatch reports.

The SEC could hunt for evidence of anyone shorting Treasury securities, one law professor told MarketWatch. "Once you find out who is trading in usual large volumes, then you can look into whether they have associations with anyone at S&P," the professor, John Coffee, added.

Wall Street already knew that a downgrade was likely. S&P had already put the US on "CreditWatch negative" - saying there was at least a 50% chance of a downgrade if lawmakers didn't "change the trajectory" of the nation's debt rate.

It seems like the SEC would have to investigate leaks on the government side as well. S&P notified the Treasury Department about the downgrade before the public, and someone from Treasury could have blabbed. Will the SEC also look at whether government employees made improper trades?

Standard & Poor's has done something few people thought possible: unite Democrats and Republicans. Both are demanding more scrutiny of the agency and possibly restrictions on its influence, The Wall Street Journal reports.

The Senate Banking Committee is reportedly considering a hearing to investigate the process that led to S&P's downgrade. Banking regulators "almost made it a given that you have to have these ratings," said Randy Neugebauer, a House Republican from Texas, the Journal reported. "What we're saying is we don't want them totally relying on ratings in making those determinations."