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Moody’s Sued Over Bad Ratings

Moody’s Sued Over Bad RatingsTeamsters class action lawsuit alleges stock price fell after mass downgrades

September 28, 2007

By JERRY DeMUTH

Moody’s Corp. and its chief financial officer have been accused in an investor lawsuit of assigning “excessively high ratings to bonds backed by risky subprime mortgages” which were “materially misleading to investors concerning the quality and relative risk of these investments.” The lawsuit was filed as the credit ratings agencies face intense federal scrutiny over issuing glowing reports as they collected big fees from securitizers.

Even as the number of delinquencies rose, according to the suit, filed as a class action in U.S. District Court in New York by the Teamsters Local 282 Pension Trust Fund, “Moody’s maintained its excessively high ratings, rather than downgrade the bonds to reflect the true risk of owning subprime mortgage-backed debt instruments.”

Defendant Linda S. Huber, in her role as CFO and EVP, the complaint alleges, was “involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information” although, under federal securities laws, she “had a duty to disseminate promptly , accurate and truthful information with respect to the company’s financial condition and performance.”

She thus participated in the company’s “fraud or deceit on purchasers of Moody’s common stock by disseminating materially false and misleading statements and/or concealing material adverse facts,” the complaint alleges, maintaining that this caused the Teamsters Pension Trust Fund and others to purchase Moody’s common stock, they would not have otherwise purchased, at “artificially inflated prices.”

After maintaining its high ratings for so long, Moody’s “shocked investors” on July 11 when it announced that it was downgrading 399 mortgage-backed securities issues from 2006, placing an additional 32 under review for possible downgrade and had already downgraded 52 bonds issued in 2005, according to the complaint, which was filed on Wednesday. Following those downgrades, Moody’s stock, which had been trading above $60, fell below $45 a share in August.

An attachment shows that in the eight-month period from November 2006 to July 2007, the fund purchased 4,340 shares and sold 1,600 shares, making its final purchase at $62.08 a share on July 11.But it had sold shares at $66.21 in November, purchased shares at $72.96 in February, sold shares at $65.30 in March, then purchased shares at $67.59 in May, showing that the fund was purchasing new shares at higher prices than it had last sold shares.

“We believe the suit has no merit,” a Moody’s spokesman told MortgageDaily.com. “And we look forward to it being dismissed expeditiously.”

The role of Moody’s Investors Service and Standard & Poor’s in the growing problems plaguing the subprime mortgage lending industry and the agency-rated securities back by subprime loans was the topic of hearings held by the Senate Banking Committee on Wednesday and Thursday.

Securities and Exchange Commission Chairman Christopher Cox told the committee the agency was examining whether the agencies had compromised their impartiality by simultaneously rating MBS while providing advice to Wall Street packagers of the mortgages as to how to package the loans to receive high ratings.

Cox also said that President Bush had instructed an interagency committee, headed by Treasury Secretary Henry M. Paulson Jr., to examine rating agency roles in mortgage lending practices.

The Association for Financial Professionals commented favorably on Cox’s announcements but urged the SEC to take further steps, including reviewing its recently finalized rules regarding the credit rating agencies.

“We are encouraged that the SEC is conducting an examination of the role that credit rating agencies played in the current subprime mortgage market turmoil and look forward to seeing their conclusions,” said AFP President and CEO Jim Kaitz. “Unfortunately, the current mortgage market problem highlights the conflict of interest issues that AFP’s members first identified in 2001.

“The final rules approved by the SEC in May made significant progress in addressing many of concerns regarding the credit rating agencies,” he noted. “However, additional steps can be taken. As such, I urge the SEC to finish the job by reviewing its rules and adopting the recommendations that AFP made in its March 2007 comment letter.”

Those recommendations included establishing distinct and absolute separation between rating analysts and credit rating agency staff responsible for generating revenue from credit ratings, rating assessment services, corporate governance reviews, or other ancillary services offered by the credit rating agency. It further asked that the SEC bar analyst compensation from being linked in any way to revenue generated from credit ratings or any ancillary services.

Last year, the SEC was given additional authority to oversee recognized rating agencies when Congress approved the Credit Rating Agency Reform Act of 2006. That authority allows the SEC to impose an element of accountability on rating agencies to produce credible and reliable ratings, according to Kaitz. The reform act also gave the SEC the authority to address the conflicts of interest issues that were highlighted in the Senate committee’s hearings, he said.

 

Jerry DeMuth is an award winning journalist who has been reporting for four decades.

e-mail Jerry at demuth933@earthlink.net


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