Suit Against Moody’s Allowed to Proceed

 

On Monday, Judge Shirley Wohl Kram of the U.S. District Court for the SDNY ruled that a putative class action against Moody’s Corp. can go forward. See “Shareholder lawsuit vs Moody’s allowed to proceed,” by Martha Grayhow, Reuters, Monday, Feb. 23, 2009. The lawsuit seeks class action status on behalf of Moody’s investors who purchased its securities from February 3, 2006 to October 24, 2007, according to the article. Moody’s filed a motion to dismiss, which the court granted in part and denied in part.

Reuters reports that the case accuses the company and CEO Raymond McDaniel of making false and misleading statements in order to artificially bolster Moody’s stock price, and of falsely claiming it was an independent body that published ratings accurately and impartially. Judge Kram’s Order further identifies Plaintiffs’ allegations of wrongdoing to include misrepresentations regarding Moody’s independence, the integrity of its ratings, and its handling of conflicts of interest, among other things.

Moody’s argued that the lawsuit should be dismissed as time barred, or, in the alternative, that it fails to sufficiently allege a material misrepresentation, scienter (i.e., fraudulent intent), and loss causation. Moody’s also argued that the claims against individual defendants should be dismissed.

In reaching its decision, the court found that facts alleged by the plaintiffs “belie defendants’ claims of independence and ratings integrity,” Reuters reports. Judge Kram did narrow the lawsuit, however, dismissing claims against former Moody’s Investors Service COO Brian Clarkson as well as against Michael Kanef, the company’s chief regulatory and compliance officer. The court also ruled that the plaintiffs could amend their complaint to attempt to properly plead the dismissed claims.

Following the ruling, the article reports that Moody’s stated: “Although we are disappointed that the court did not dismiss the lawsuit entirely, we recognize that it is very difficult to prevail on a motion to dismiss ‘” the company said. “We are pleased that the court still recognized many flaws in this lawsuit and dismissed a substantial part of the case.”

Ira Press, an attorney for the Moody’s shareholders, stated that the Order allows his clients to proceed on most of the claims, adding that plaintiffs were reviewing whether to try to get the dismissed claims reinstated.

Readers may recall blogs in this space posted on October 29, 2008 (“Credit Rating Agencies Offer Excuses to Congress”) and November 3, 2008 (“Are Credit Ratings Agencies Just a Bunch of Bull?”). As noted, Congress inquired into apparently corrupt credit ratings issued by Moody’s, Standard & Poor’s, Fitch, Inc., the leading credit rating agencies. Internal emails and documents were especially devastating to the credit rating agencies. Moody’s employees expressed tension and anxiety as the sub-prime mortgage related securities that were awarded top ratings by the firm were staggered by ballooning delinquencies. An unidentified Moody’s employee wrote, as part of a survey after a September a 2007 town hall meeting, “It seems to me that we have blinders on and never question the information we were given. Combined, these errors make us look either incompetent at credit analysis, or likely we sold our sole to the devil for revenue, or a little bit of both.”

In an internal email that came to light during hearings on the Hill, one S&P analyst admitted that their credit ratings were inflated and unsupported, saying, “it could be structured by cows and we would rate it.” In other words, the credit ratings were a bunch of bull. In another internal exchange, a different analyst told a co-worker, “let’s hope we are all wealthy and retired by the time this house of cards falters.”

Millions of investors relied upon Moody’s and the other credit rating agencies to issue unbiased, objective evaluations of the credit worthiness of the sub-prime securities. As the actions against Moody’s points out, shareholders of these companies were also betrayed.