Copyright 2010 International Herald TribuneAll Rights Reserved The International Herald Tribune
May 12, 2010 Wednesday
SECTION: FINANCE; Pg. 2
LENGTH: 673 words
HEADLINE: S.E.C. notifies Moody’s it faces suit on statements
BYLINE: BY DAVID SEGAL
DATELINE: NEW YORK
The U.S. Securities and Exchange Commission has warned that it might sue the ratings agency Moody’s for making “false and misleading” statements as part of its application as a ratings organization. FULL TEXT
The U.S. Securities and Exchange Commission has warned that it might sue the ratings agency Moody’s for making ”false and misleading” statements as part of its application as a ratings organization.
The S.E.C. sent the New York-based company a Wells notice, the regulator’s way of signaling that it was considering legal action against the firm. Moody’s received the notice March 18 and disclosed it Friday in a quarterly filing.
The company said that the notice had resulted from actions by members of its European rating surveillance committee who ”may have violated Moody’s professional code of conduct,” according to a spokesman, Michael N. Adler. Moody’s reported the incident to the S.E.C. in 2008, Mr. Adler said in a statement, and has complied with the commission’s subsequent requests for information.
”Moody’s policy clearly prohibits the conduct in which these employees engaged,” Mr. Adler said.
According to regulatory filings, Raymond W. McDaniel Jr., chief executive of Moody’s, sold or exercised options worth about $4.3 million on March 18, the same day that his company received the Wells notice.
Shares of Moody’s closed at $29.66 the day of Mr. McDaniel’s sale, near their high of $30.54 so far this year. The shares have traded as low as $18.50 over the last 52 weeks. Monday, the shares fell as much as 12 percent but finished the day down 7 percent at $21.77.
Moody’s said Mr. McDaniel’s sales in March had been part of a prearranged plan established about a month before the Wells notice arrived.
Scrutiny of the ratings agencies is increasing. Moody’s and the other two major ratings agencies – Standard & Poor’s and Fitch – have been widely criticized for the high grades they affixed to billions of dollars of subprime mortgages that were rendered worthless, or nearly so, by the credit crisis. Critics have contended that the companies failed in their roles as independent risk analysts, in part because they were paid by the investment banks whose products they were analyzing.
According to Moody’s, the S.E.C. was prompted by a report in May 2008 in The Financial Times. The article stated that in 2007, members of a committee that oversaw a certain type of European derivative knew that some of the products had been given inflated ratings because of a problem in the company’s risk-modeling software.
Without that problem, The Financial Times reported, the bonds would have received ratings as many as four notches lower. Moody’s corrected the software error, but the bonds maintained their Triple A ratings until January 2008.
Moody’s hired an outside law firm to investigate the matter and subsequently took disciplinary actions that included terminations, according to Mr. Adler.
In June 2007, the company submitted an application to become a nationally recognized statistical rating organization. That application included a code of conduct. The Wells notice essentially says that because employees of Moody’s had violated that code, the application included a false and misleading statement.
What the S.E.C.’s action will mean for lawsuits against the ratings agencies is unclear, although Adam Savett of RiskMetrics, which has tracked the litigation, predicts that it might help plaintiffs’ lawyers.
”Judges are human, and when they look at the facts of a case, if this Wells notice turns into an actual lawsuit, it will become part of the gestalt when judges weigh whether to allow cases to go forward,” he said. ”Then again, if you take a step back, the judges in these cases have been focusing very narrowly on the facts before them, taking each case on its merits, teasing out the true culpability.
”There was a concern in the business community initially that there would be mass lynchings for the ratings agencies in courts across the country,” he said. ”But that has not happened.”
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