Enforcement officials from the Securities and Exchange Commission and Justice Department said Wednesday that their staffs are targeting the role of Wall Street rating agencies in the financial meltdown.
The three dominant agencies _ Moody's Investors Service, Standard & Poor's and Fitch Ratings _ have been widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities, whose collapse touched off the financial crisis.
SEC Enforcement Director Robert Khuzami told the Senate Judiciary Committee that his staff is "looking very closely at credit rating agencies" and is "focused on that area."
A 2007 law empowers the SEC to bring enforcement actions against rating agencies based on false statements they may have made, he said.
Assistant U.S. Attorney General Lanny Breuer said the Justice Department also is "looking at" rating agencies.
New York Attorney General Andrew Cuomo pursued the three big Wall Street raters last year, securing an agreement from them to overhaul how they evaluate investments backed by risky mortgage debt. The accord was meant to end what the industry calls "ratings shopping" that pits the agencies against one another.
The agencies are crucial financial gatekeepers. Their grades of creditworthiness can be key factors in determining at what cost securities will be purchased by banks, mutual funds, state pension funds or local governments.
Khuzami, Breuer and Kevin Perkins, assistant director of the FBI's Criminal Investigative Division, detailed federal efforts to pursue fraud and rising abuses in the aftermath of the financial crisis.
Mortgage fraud, which spiked to record levels in the wake of the subprime loan collapse in 2007, is an especially intense area of focus by federal and state prosecutors. Mortgage fraud investigations by the FBI now total more than 2,700, compared with 881 three years ago.
The Justice Department "has redoubled its efforts to uncover abuses involving mortgage lending" and related fraud schemes, Breuer testified. "We're prosecuting those cases around the country."
Charges related to mortgage fraud are pending against about 500 individuals and firms nationwide, he said.
The financial distress also has revealed a growing number of pyramid investment schemes that were undetected in stronger economic times _ the highest-profile being the multibillion-dollar fraud by Bernard Madoff that continued for nearly two decades, the officials said.
"A week doesn't go by" without a new Ponzi case being opened, Perkins told the panel.
Sen. Ted Kaufman, D-Del., who chaired the hearing, said to restore the public's faith in the financial markets, "We must identify, prosecute and send to prison the participants in those markets who broke the law."
The SEC and the Justice Department have conducted wide-ranging investigations of big companies across the financial services industry that blew up in the crisis. But a year after the catastrophe struck, charges haven't yet come in most of the probes.
Spokesmen for Moody's and Fitch Ratings didn't respond to telephone calls seeking comment Wednesday evening. A spokesman for Standard & Poor's had no immediate comment.