McGraw-Hill said it had received a Wells notice from the SEC stating that the agency's staff might recommend that the commission impose a fine or other civil penalty against S&P, alleging it violated federal securities laws with respect to S&P's ratings for a particular 2007 offering of collateralized debt obligations.

Janet Tavakoli, president of Tavakoli Structured Finance Inc., and a critic of both the ratings agencies and the SEC, said the SEC inquiry comes too late. "Will [the SEC probe now] do anything? Oh God, no. It's not even an indictment. It's way too late," she said. "The SEC made a farce of regulation. This is a slap in the face."

The investigation of S&P does, however, raise the question of whether ratings of other similar CDOs face sanction.

A spokesman for S&P's rival, Fitch Ratings Inc., said Monday that it received no similar notice. Moody's Investors Service did not return a call for comment.

The Senate Permanent Committee on Investigations in April accused both S&P and Moody's of acting similarly in rating Delphinus CDO 2007-1, Ltd., the CDOs the SEC cited in the Wells notice to McGraw-Hill.

McGraw-Hill said it was cooperating with the SEC, but the agency could impose civil money penalties, disgorgement of fees "or other appropriate equitable relief."

An SEC spokesman declined comment.

According to the Senate committee, both S&P and Moody's initially gave AAA ratings to six or seven tranches of the collateralized debt securities from the CDO as part of a mid-July rush to issue ratings, then almost immediately began dramatically downgrading the ratings, eventually to junk status.

The report cited the positive ratings and the sharp downgrade as prime examples of raters' conflict of interest and lack of government scrutiny of them.

"Although ratings downgrades for investment grade securities are supposed to be relatively infrequent, in 2007, they took place on a massive scale that was unprecedented in U.S. financial markets," the committee's report said. "The massive downgrades [by Moody's and S&P] made it clear that the original ratings were not only deeply flawed, but the U.S. mortgage market was much riskier than previously portrayed."

The report suggested that the high ratings were never warranted and in many cases based on out-of-date information that wasn't being properly updated. It also suggested the ratings reflected that the ratings agencies were interested in winning market share and were willing to compromise their work in order to curry favor with securitizers and win more rating business.

"The timing of this surge of new ratings on the eve of the mass downgrades is troubling, and raises serious questions about whether S&P and Moody's quickly pushed these ratings through to avoid losing revenues before the mass downgrades began," the report said.

Tavakoli suggested the strong ratings were "a fraud" and the biggest question is why the SEC didn't step in at the time.

Tavakoli said she repeatedly warned the SEC in early 2007 that ratings of securitizations were being done in a sloppy fashion and with "smoke and mirrors" rather than real data. She said that even as one big bank, HSBC Bank USA Inc., was writing down loans, ratings agencies were continuing to issue wildly inflated ratings for similar packages of CDO packages from other banks.

Tavakoli in a February 2007 letter urged the SEC to withdraw the ratings agencies' recognition as Nationally Recognized Statistical Rating Organizations, suggesting they were engaged in "arbitrary junk science" rather than real ratings.

"All of these deals were an interconnected Ponzi scheme. Why aren't we investigating the SEC? The SEC had the authority to act and can stop the deals but chose not to. If it wants to investigate someone, it should look in the mirror."

Tavakoli suggested the inquiry now is an effort to quiet Capitol Hill concerns well after the fact.