(By Vic Hartman) The Department of Justice announced February 3, 2015, a $1.375 billion settlement from the long-standing and venerable ratings agency, Standard & Poor’s Financial Services LLC (S&P). DOJ had charged S&P with civil charges based on laws enacted after the Savings and Loan crisis here in the United States in the late 1980s. S&P was charged with the civil version of mail fraud, wire fraud, and bank fraud.

The government’s case was that S&P misrepresented its rating on Residential Mortgage-Backed Securities (RMBs) and Collateralized Debt Obligations (CDOs). According to the government, S&P under-rated the risk level of the RMBs and CDOs in its desire to grow and maintain profits as they were competing with Moody’s Investors Services and Fitch Ratings. The profit-seeking interest behind this misrepresentation outweighed the interest of the financial institutions and other investors they were in business to serve.
How could this happen? And was it occurring in isolation?

An organization’s culture can lead to many undesirable consequences, including bad governance and, worse, fraud. The authors of “A.B.C.’s of Behavioral Forensics (John Wiley & Sons, 2013)”, draw on their collective experience in psychology, psychiatry, accounting, auditing, and law enforcement to describe the human motivations behind fraud . The authors’ aptly coined term, “ABCs” of fraud, explaining them as bad Apples, bad Bushels, and bad Crops, refer to fraud committed by a single rogue executive, a colluding set of bad apples (with accomplices) called a bad bushel, and when the whole organization or industry is afflicted by a toxic culture, the bad crop. It is an easily-understandable way of describing an extraordinarily complex interplay of fraudulent behaviors at different levels. The ABC theory explains neatly how a single individual, a unit, or the organization itself can become corrupted.

With S&P, the DOJ’s investigation concluded that S&P senior analysts told the company’s leadership that it was inappropriately giving top ratings to financial products they knew were of lesser quality. But the S&P management refused to downgrade the underperforming assets. Why? Because of worries that doing so would hurt S&P’s business! A parallel example: an automobile manufacturer declines or delays an expensive recall and replacement of a defective part. Safety is an issue and the consumer can get hurt, but the company’s bottom line is still intact. The difference in the S&P case is that it violated civil and criminal federal law to knowingly provide a false rating. And, of course, these actions handsomely improved S&P’s bottom line (some estimates say by as much as $400 million).

The authors of “A.B.C.s of Behavioral Forensics” would probably describe the S&P failure as the result of a bad crop. The fraud is committed at the C-suite level, but it would appear that the S&P culture was not unfriendly to this behavior, suggesting that the whole Crop was infected.

This raises the next question—-was it this Crop alone, or did the infection appear in other companies and stakeholders as well? Or, to put it as an extension of the ABC terminology—did we have a bad Farmer’s Market (i.e. the entire mortgage service industry)? Finance folks would call such industry-wide effects as “financial contagion” and while the ABC book did refer to the LIBOR rigging scandal that is still being played out, it did not envisage environmental pressures and spill-over effects to be so extreme as to cause the bad Farmer’s Market scenario.

We’ll plow into that “A-B-C-FM” issue in a following post.

Join us for more insights into behavioral forensics (behind fraud and similar white collar crimes) from the authors of ABCs of Behavioral Forensics (Wiley, 2013): Sri Ramamoorti, Ph. D., Daven Morrison, M.D., and Joe Koletar, D.P.A., along with Vic Hartman, J.D.  These distinguished experts come from the disciplines of psychology, medicine, accounting, law, and law enforcement to explain and prevent fraud.  Because we are inspired to bring to light and address the fraud problems in today’s headlines, we encourage our readers to come back and revisit us regularly at


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