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S&P executive cleared of CMBS ratings fraud charges

But judge finds Barbara Duka negligent of failing to inform investors of changes to CMBS

Former Standard & Poor's Ratings Services executive Barbara Duka was cleared Tuesday of fraud charges brought by the Securities and Exchange Commission over changes made to ratings of commercial mortgage-backed securities, but was found negligent of not informing investors of the changes.

SEC administrative law judge James E. Grimes said in an initial decision that there was "no evidence" that Ms. Duka, who headed S&P's commercial mortgage-backed securities group, changed the methodology for any reason "other than the belief that the change was analytically justified."

SEC enforcement officials claimed in their January 2015 enforcement action that Ms. Duka committed fraud to generate ratings business from issuers and sought an industry ban plus a $150,000 fine. Mr. Grimes did find Ms. Duka negligent in failing to ensure that the change was disclosed in investors' presale reports between 2009 and 2011, and ordered her to pay a $7,500 fine.

The transactions at issue in this case were called "conduit/fusion" deals, which in April 2009 accounted for 85% of the outstanding CMBS market. A conduit transaction is a large pool of diversified small-balance loans, and a fusion transaction is a conduit transaction that also includes large loans, according to the case documents.

In separate legal action, Ms. Duka challenged the constitutionality of the SEC administrative law process in the 2nd U.S. Circuit Court of Appeals in New York, but the case was dismissed in 2016.