(Corrects S&P's 2013 revenues in 8th para to US$2.3bn, from parent company's McGraw Hill Financial's US$4.9bn.)

By Joy Wiltermuth

LONDON, Jan 23 (IFR) - US regulators shocked the ratings industry this week when it announced charges against a former employee of Standard & Poor's, claiming she misled investors about some CMBS trades the agency rated.

It is the first time the SEC has pursued charges against an individual from a rating agency since the regulator got broader scope over the agencies under the Dodd-Frank Act in 2010.

The charges could lead to a fine, settlement or a sanction barring former S&P staffer Barbara Duka from the securities industry.

The move has cast a pall over the credit ratings industry, which has been buffeted by negative headlines since being blamed for its role in the US mortgage meltdown.

"There is a lot of room for judgement in the ratings world," Richard Jones, chair of the finance and real estate group at law firm Dechert, told IFR.

"But this seems like the SEC is looking for a highly engineered result, even though regulators have given no real clarity on how they would make the ratings process better."

The SEC announced this week that S&P had agreed to a US$77m settlement for what it said were fraudulent practices, and slapped it with a one-year ban on rating some CMBS deals.

Market participants said this was effectively just a rap on the knuckles given S&P's US$2.3bn revenues, but that the personal targeting of Duka was a different and far more serious matter.

The US regulator has charged Duka, the former head of the S&P CMBS unit at the centre of the investigation.

It alleges that her group "intentionally or recklessly" published "inaccurate data" in pre-sale reports about commercial mortgage bonds that S&P had been hired to rate.

The SEC said this was done while changing S&P's methodology to make the deals "more attractive to fee-paying CMBS issuers" - while not informing investors of the changes.

DEEP IMPACT

The allegations are an echo of the unsavoury credit rating practices in the run-up to the financial crisis, raising fears that investors could again be seduced into buying riskier securities than they intended to.

Meanwhile some on the buyside wonder if the case will lead the agencies into adopting vague criteria to avoid falling foul of regulators, or increase the chance that divergent viewpoints about the creditworthiness of deals will be swept under the carpet.

"You might see them become lax to the point where you could drive a truck through the criteria without triggering a violation," one investor said.

"But that would make (ratings) less useful, with fewer nuances, and exposes investors to more credit issues."

As one market executive said: "It sort of puts the fear of God that this could happen to you."

FIX ON SIX

The SEC has focused on eight conduit CMBS deals on which it alleges Duka gave the green light to relax S&P's methodology, without ever informing investors.

Six of the deals, the regulator said, had a skimpier buffer against losses than the metrics that S&P had advertised in its published criteria.

"The bottom line is that S&P used criteria that (were) less stringent but lied to investors about it," said Andrew Ceresney, the SEC's enforcement director.

Some in the market note warily that the agency itself seems to have got off relatively easily - not least because S&P can still carry on rating commercial mortgage bonds backed by a single borrower or single assets.

Meanwhile the personal pursuit of Duka strikes many as unwarranted and perhaps unfair, particularly in a sector where there is arguably plenty of blame to be shared.

"In 2008, you had the fall of Lehman Brothers and Bear Stearns and no scalps were taken," the market executive said.

"But now you have Barbara Duka ... (punished for) the equivalent of a speeding violation. Something just doesn't seem right, or proportional." (Reporting by Joy Wiltermuth; Editing by Natalie Harrison, Alex Chambers, Marc Carnegie and Matthew Davies)