After 30-year-old Harold W. “Terry” McGraw III helped his father fend off a hostile takeover from American Express Co. more than three decades ago, McGraw-Hill Cos. shareholders were rewarded with an 11 percent annualized return through 2012.

No such good fortune is anticipated now after the U.S. government on Feb. 4 accused the company and its Standard & Poor’s credit-rating unit with fraud. The stock has dropped 20 percent, going from a premium to the market to a discount, and McGraw, now chief executive officer and the family patriarch, faces the firm’s worst crisis in its 125-year history.

“I’ve known three generations of McGraws and they all felt the same way: the firm is sacrosanct,” Joseph Dionne, Terry McGraw’s predecessor as CEO, said in a Feb. 21 telephone interview.

The lawsuit, which seeks as much as $5 billion in damages, or the equivalent of more than five years of profit, reduced the New York-based company’s market value by $3.2 billion and McGraw’s 1.56 percent stake by $54 million to $198.9 million, according to data compiled by Bloomberg. The shares closed at $46.72 yesterday, and credit-default swaps tied to its debt traded near a 10-month high. Moody’s Investors Service cut rival McGraw-Hill’s credit rating by two levels to Baa2, or two steps above junk.

Family Legacy

After this month’s rout, the worst since September 2009, the stock trades at 13.74 times earnings, down from 17.16 before the lawsuit was filed and below the average 14.96 for the S&P 500.

“This is his family legacy on the line,” Jeffrey Manns, an associate professor of law at George Washington University in Washington, said of McGraw in a Feb. 13 telephone interview. “He’s gambled his financial future on the future of S&P, and he has more of a stake in the resolution of this litigation than any other party.”

The company, which declined to make the 64-year-old McGraw available for an interview, said in a Feb. 5 statement that the lawsuit is without merit. The government didn’t sue Moody’s or Fitch Ratings. Jason Feuchtwanger, a McGraw-Hill spokesman, said in an e-mail that the company expects to prevail against the claims and forecasts 2013 will be “another strong year.”

McGraw, speaking on a conference call with analysts and reporters Feb. 12, after S&P reported its highest revenue since at least 2009, said executives “will vigorously defend our company, as we have successfully defended against more than 40 other financial crisis-related cases.”

1888 Roots

Investors have spurned firms hit with federal lawsuits. After paying a $550 million fine to settle charges from the U.S. Securities and Exchange Commission that it misled investors on sales of collateralized debt obligations, Goldman Sachs Group Inc. has yet to recover its market value, which fell to $73.5 billion yesterday from more than $100 billion before it was sued in April 2010.

McGraw-Hill dates back to 1888, when James H. McGraw acquired The American Journal of Railway Appliances, according to the company’s website. He later merged his book-publishing department with John A. Hill’s, creating the McGraw-Hill Book Co.

Terry McGraw, who graduated from Tufts University in Medford, Massachusetts, and has an MBA from the University of Pennsylvania’s Wharton School of Business, took a leave of absence in 1979 from GTE Corp., now part of Verizon Communications Inc., when he was brought in to defend the family legacy from American Express, Dionne said.

Left Astonished

He joined his brother Robert as they rallied around the late Harold W. McGraw Jr. while he beat back James D. Robinson III’s charge-card issuer. Bringing in his sons showed the family’s concern, “not only about the company, but all the people in the company,” Dionne said.