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DOJ suit vs S&P weighs on its owner, McGraw-Hill

NEW YORK (AP) -- Shares of McGraw-Hill Cos. slid Tuesday after the U.S. government accused its Standard & Poor's unit of rating mortgage investments too highly and helping set off the 2008 financial crisis.

THE SPARK: The Department of Justice sued S&P, saying the credit ratings agency gave high marks to mortgage-backed securities that later went sour, even though analysts knew they were risky. The government, in a civil charges filed late Monday, said S&P misrepresented the risks because it wanted more business from the banks.

S&P denied wrongdoing.

THE BIG PICTURE: The lawsuit is the government's first major action against one of the country's three major credit ratings agencies regarding their high marks on Wall Street mortgage investments that later went bad in the housing crisis.

If S&P is eventually found to have committed civil violations, it could face fines and limits on how it does business. The government said in its filing that it's seeking financial penalties.

McGraw-Hill, which is based in New York, also has an education arm, which it is selling to private equity firm Apollo Global Management LLC for $2.5 billion in cash and debt.

THE ANALYSIS: Several analysts were not much concerned with how the lawsuit would affect McGraw-Hill's business, recommending that investors use the decline in the company's stock as an opportunity to buy stock on the cheap.

The lawsuit could weigh on McGraw-Hill's shares in the near term, said Raymond James analyst William Warmington. But the analyst, who has an "Outperform" rating on the company's shares, said he is still confident in the health of S&P's business.

Barclays Capital analyst Manav Patnaik, who has a less optimistic "Neutral" rating on McGraw-Hill, said that a court battle could stretch for years, and questioned whether the DOJ would be able to prove wrongdoing against S&P.

SHARE ACTION: Down 6.6 percent Tuesday afternoon to $46.98. The stock is off 18 percent in the past two days after hitting a 5-year high of $58.62 on Friday.

Shares of Moody's Corp., which operates a competing ratings service, dropped $1.42, or 2.9 percent, to $48.03. Its shares dropped 11 percent Monday on news that charges were coming.