(Adds details from U.S. lawsuit in 10th paragraph. For more Standard & Poor’s coverage, see {EXT3 <GO>}.)

Feb. 8 (Bloomberg) -- Standard & Poor’s fired two executives it had hired during the credit crisis in 2008 to “clean up” rating processes when they tried to do just that, according to a lawsuit filed by the state of California.

The largest ratings firm hired Mark Adelson to improve grading criteria and David Jacob to remove market influences, then replaced them in 2011, according to the complaint filed Feb. 5 in California Superior Court in San Francisco.

Jacob, 56, who ran structured finance, was told by S&P’s former president Deven Sharma to consider “changing direction” after the firm started losing business, in part because of tighter criteria created by Adelson, the chief credit officer, according to the complaint. Both allegedly refused to “collaborate” and were replaced in December 2011.

California joined about 15 states and the Justice Department this week in suing S&P, alleging the unit of New York-based McGraw-Hill Cos. deliberately understated the risk of bonds backed by loans made to the riskiest borrowers to win business from Wall Street banks.

Ed Sweeney, a spokesman for S&P, didn’t immediately return an e-mail seeking comment. Sharma couldn’t be reached for comment.

“This is a business, but you can’t tell the public that criteria is independent of commercial activities when it’s not,” Jacob said today in a telephone interview.

$2.8 Trillion

Adelson, 52, now chief strategy officer for BondFactor Co., a municipal bond insurance startup, declined to comment in an e- mail.

S&P rated more than $2.8 trillion of residential mortgage- backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 to October 2007, the Justice Department said.

Jacob wanted to “ensure that S&P analysts didn’t loosen standards at the request of bankers,” while Adelson, was described as a “vocal critic” of rating companies before being hired, according to a lawsuit against S&P filed by North Carolina on Feb. 5 in Wake County Superior Court in Raleigh.

According to the federal complaint, S&P falsely represented to investors that its ratings were objective, independent and uninfluenced by any conflicts of interest. The company shaped its analysis to suit its business needs to the extent that one analyst of CDOs said loosening the measure of default risk for one security in 2006 “resulted in a loophole in S&P’s rating model big enough to drive a Mack truck through,” according to the suit.

Other Suits

Other states that have filed suits include Delaware, Missouri and Illinois.

The California case is California v. The McGraw Hill Companies, 13-528491, California Superior Court, County of San Francisco.

The North Carolina case is North Carolina v. The McGraw Hill Companies Inc., 13-CV-1703, North Carolina Superior Court, Wake County (Raleigh).

--With assistance by Joel Rosenblatt in San Francisco and Zeke Faux in New York. Editors: Alan Goldstein, Mitchell Martin