Justice Department Settles $864MM Case Against Moody’s

The Department of Justice, 21 states and the District of Columbia reached a nearly $864 million settlement agreement with Moody’s Investors Service, Moody’s Analytics and their parent, Moody’s Corporation.

The settlement resolves allegations arising from Moody’s role in providing credit ratings for Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDO), contributing to the worst financial crisis since the Great Depression.

The agreement resolves pending state court lawsuits in Connecticut, Mississippi and South Carolina, as well as potential claims by the Justice Department, 18 states and the District of Columbia.

The settlement follows an investigation by the Justice Department’s Consumer Protection Branch and the U.S. Attorney’s Office for the District of New Jersey into potential claims pursuant to the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and investigations conducted by various State Attorneys General pursuant to state law.

“Moody’s failed to adhere to its own credit rating standards and fell short on its pledge of transparency in the run-up to the Great Recession,” said Principal Deputy Associate Attorney General Bill Baer. “Today’s settlement contains not only a significant penalty and factual admissions of its conduct, but also a commitment by Moody’s to new and continued compliance measures designed to ensure the integrity of credit ratings going forward.”

“Our investigation revealed, and Moody’s has now acknowledged, that Moody’s used a more lenient standard than it had itself published,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “Investors relied on Moody’s credit ratings to be objective and independent, and they naturally expected Moody’s to follow its own published methods.”

“Moody’s touted a particularly robust analytical framework for rating RMBS and CDOs,” said U.S. Attorney Paul J. Fishman for the District of New Jersey. “Moody’s now admits that it deviated from its methodologies and failed to disclose those changes to the public. People making decisions on how to invest their money thought they could rely on the ratings Moody’s assigned to these products. When securities are not rated openly and honestly, individual investors suffer, as dose confidence in all parts of the financial sector.”

The multi-faceted settlement includes a statement of facts in which Moody’s acknowledged key aspects of its conduct, and a compliance agreement to prevent future violations of law. The statement of facts addressed Moody’s representations to investors and the public generally about: 1) its objectivity and independence, 2) its management of conflicts of interest, 3) its compliance with its own stated RMBS and CDO rating methodologies and standards and 4) the analytic integrity of certain rating methodologies.

The statement of facts addresses whether Moody’s credit ratings were compromised by what Moody’s itself acknowledged were the conflicts of interest inherent in the so-called “issuer pay” model, under which Moody’s and other credit rating agencies are selected by the same entity that puts together and markets the rated securities and therefore stands to benefit from higher credit ratings.

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