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Judge lets US pursue $5 billion fraud lawsuit vs. S&P

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A U.S. federal judge has ruled that the U.S. government may pursue its $5 billion civil fraud lawsuit accusing Standard & Poor's of misleading investors by inflating credit ratings.

U.S. District Judge David Carter in Santa Ana, Calif., said late on Tuesday the government had made its case sufficiently to support its fraud claims, while denying S&P's motion to dismiss the lawsuit.

Fourteen U.S. states and the District of Columbia are suing S&P, a unit of McGraw Hill Financial, over similar claims in the U.S. District Court in Manhattan.

The Feb. 4 lawsuit accused S&P of not being objective in its ratings from 2004 to 2007 and inflating ratings so that it could win more fees from issuers and bankers that pay for its ratings.

(Read more: S&P Revises US Credit Outlook to 'Stable' From 'Negative'

The lawsuit outlined in what the judge called "comprehensive detail"

how the largest U.S. credit rating agency failed to downgrade its ratings for collateralized debt obligations despite "clear knowledge" that they were backed by deteriorating residential mortgage-backed securities.

According to the complaint, S&P rated more than $2.8 trillion of RMBS and nearly $1.2 trillion of CDOs from September 2004 to October 2007.

S&P has argued that statements about the integrity of its ratings constitute "puffery" that cannot be a basis for the fraud lawsuit.

(Watch: Why Business Spending Set to Decline: S&P)

The Justice Department had sued under the Financial Institutions Reform, Recovery and Enforcement Act, a 1989 law passed after the savings and loan crisis which allows the government to seek penalties for losses affecting federally insured financial institutions.

S&P's main rivals are Moody's Corp.'s Moody's Investors Service and Fimalac's Fitch Ratings. The government has not brought a lawsuit similar to the S&P case against either.

The case is U.S. v. McGraw-Hill Cos et al, U.S. District Court, Central District of California, No. 13-00779.