The federal government has filed a lawsuit against a prominent credit ratings agency, alleging the agency issued inflated ratings that misrepresented the true credit risks of mortgage-backed securities in the boom years leading up to the financial crisis and subsequently cost investors billions.

The U.S. Department of Justice alleges Standard and Poor’s Ratings Services and its parent company, McGraw-Hill Companies Inc., engaged in a scheme to defraud investors — many of them federally insured financial institutions — who purchased products known as residential mortgage-backed securities (RMBS) and collateral debt obligations (CDOs) under repeated assurances by S&P that its ratings of these products were objective, independent and uninfluenced by S&P’s relationships with the investment banks that issued the products, the DOJ said.

“Contrary to these representations, from 2004 to 2007, the government alleges, S&P was so concerned with the possibility of losing market share and profits that it limited, adjusted and delayed updates to the ratings criteria and analytical models it used to assess the credit risks posed by RMBS and CDO,” the DOJ said.

The complaint further alleges that between March and October 2007, S&P issued inflated ratings on hundreds of billions of dollars’ worth of CDOs, and nearly every CDO rated by S&P during that time period eventually failed.

Federal law authorizes the U.S. attorney general to seek civil penalties up to the amount of the losses suffered due to the alleged violations, which, to date, the government tallies at more than $5 billion between March and October 2007 alone.