In a statement, Standard & Poor’s called the federal case “without legal merit” and “unjustified,” and the company has some track record in fending off legal actions because of First Amendment protections for its credit-rating pronouncements. The company says such protections apply because it simply offers opinions.

“A number of court rulings have dismissed challenges made with 20/20 hindsight to a credit rating agency’s opinions of creditworthiness,” the company noted in a lengthy statement.

Justice Department officials said Standard & Poor’s had given the highest, AAA credit ratings to many complex securities, based largely on bundles of mortgages, even though the company knew by 2006 that the housing sector was crashing.

“S&P misled investors, including many federally insured financial institutions, causing them to lose billions of dollars,” Holder said. “In reality, the ratings were affected by significant conflicts of interest, and S&P was driven by its desire to increase its profits and market share to favor the interests of insurers over investors.”

Sixteen states – including Idaho, North Carolina and Washington – now have filed their own lawsuits against the credit-rating agency, making many of the same allegations but basing their cases around alleged violations of state law.

Holder and acting Associate Attorney General Tony West skirted questions Tuesday about why they’d brought civil, instead of criminal, charges. Delery noted that the 1989 Financial Institutions Reform, Recovery and Enforcement Act, under which the federal lawsuit was brought, requires only proof “by a preponderance of the evidence,” rather than the higher standard required for criminal cases.

Holder declined to discuss whether the other two main ratings agencies – Moody’s Investors Service and Fitch Ratings – might be facing similar suits.

“I would think that this should be the first of several. I can’t imagine, and don’t believe, that S&P was the only rating agency to be looking the other way,” said Mark Rifkin, a securities litigation expert and partner in the New York law firm of Wolf Haldenstein Adler Freeman & Herz.

As to why the government opted against criminal charges, Rifkin thought the Justice Department “has tried to keep the burden of proof away from the criminal burden of proof of ‘beyond a reasonable doubt.’ It just makes it easier for the government’s case.”

While rating agencies have been remarkably accurate over their long history, their recent problems began around 2000, when Wall Street began pooling debt instruments – such as mortgages, car loans and credit card debt – into complex bonds.

From September 2004 through about October 2007, Standard & Poor’s issued credit ratings on $2.8 trillion worth of residential mortgage-backed securities and nearly $1.2 trillion in more complex deals that included bundles of home loans, the suit says.

Tracing the nearly century-old firm’s role in the subprime mortgage debacle, the suit alleges:

– In early 2004, Joanne Rose, the executive managing director of the firm’s structured finance unit, and Thomas Gillis, who headed the unit’s research and criteria group, wrote colleagues that concerns about the integrity of the ratings criteria should be communicated in person rather than by email if at all practical.

– In May of that year, after an analyst reported that S&P was losing a deal because its ratings were more conservative than Moody’s and Fitch’s were, managers scrapped plans to use a new computer program that would have required investment banks to cushion deals better against potential losses.

– S&P executives ignored their own code of conduct dictating that they avoid conflicts of interest, instead bowing to the demands of investment banks that paid the firm as much as $500,000 to rate a single complex offshore deal, known as a collateralized debt obligation.

– The firm assured investors that it had an “integrated surveillance process” to monitor the performance of mortgage securities, but its ratings analysts didn’t review surveillance results before issuing ratings.

– By 2006, low-level panic permeated S&P as defaults on subprime mortgages rose sharply, including unprecedented defaults in the first six to 10 months of some loans, but the firm muted its reaction while accommodating more deals from investment banks.

– On March 17, 2007, an S&P analyst elicited laughter from colleagues when he circulated a video of himself singing a parody of the Talking Heads’ song “Burning Down the House” that climaxed with the words: “Huge delinquencies hit it now . . . Two-thousand-and-six vintage. Bringing down the house.”