Federal prosecutors intend to bring civil charges against Standard & Poor's for wrongdoing in its rating of mortgage bonds prior to the 2008 financial crisis.
Allegations against the McGraw-Hill unit will center on the model used to rate the bonds and will reportedly be made in lawsuits to be filed as soon as this week.
A move by U.S. officials would be the first federal enforcement action against a major credit rating agency over alleged illegal behavior tied to the financial crisis.
The lawsuit is reportedly regarding 30 triple-A rated CDOs from the first half of 2007, and the Department of Justice is seeking "a 10 figure plus settlement and the admission of wrongdoing," according to sources.
"A DOJ lawsuit would be entirely without factual or legal merit," S&P said in a statement. "It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market – including U.S. government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained – and that every CDO that DOJ has cited to us also independently received the same rating from another rating agency."
Shares of McGraw-Hill plunged nearly 14 percent on Monday, its second biggest one-day drop ever. The worst session for the stock was Black Monday on October 19, 1987 when it tumbled 19 percent.
A person familiar with the situation said New York State Attorney General Eric Schneiderman is not part of the suit against S&P. His office declined to comment. Schneiderman has been conducting his own investigation into mortgage related issues.
S&P and its main rivals, Moody's Corp.'s Moody's Investors Service and Fimalac's Fitch Ratings, have long faced criticism from investors, politicians and regulators for assigning high ratings to thousands of subprime and other mortgage securities that quickly turned sour. Fitch said that it is not a target in any lawsuit connected to rating of mortgage securities.
"We are unable to comment on the S&P matter as it does not involve us, other than to say we have no reason to believe Fitch is a target of any such action," Fitch said in a statement.
(Read More: More Steps Needed to Save US Credit Rating: Moody's)
In a variety of lawsuits brought by investors, S&P has maintained that its ratings constitute opinions protected by the 1st Amendment to the U.S. Constitution.
—Reporting by CNBC's David Faber and Mary Thompson. Reuters also contributed to this report.