March 11, 2009

Moody’s Investors Can Pursue Securities Fraud Class Action Lawsuit Accusing the Credit Rating Agency of Falsely Claiming Independence

A US District Court judge says Moody’s Corp. investors can go ahead in part with a lawsuit accusing the credit rating agency of securities fraud. The class action lawsuit accuses Moody’s of claiming it was an independent body that impartially published accurate financial instrument ratings when such misrepresentations artificially inflated its stock price (until media reports about its compromised objectivity caused the value of its stocks to drop).

In the U.S. District Court for the Southern District of New York, Judge Shirley Wohl Kram said the plaintiffs sufficiently alleged that the credit rating agency’s statements over its independence were false. She did find deficiencies with other pleadings, however, including a failure to properly plead scienter against Michael Kanef, the group managing director of Moody’s US asset finance group, and Brian Clarkson, Moody’s chief operating officer. The court also approved the plaintiffs’ request that they be allowed to cure the pleading deficiencies.

The court also said that it did not consider Moody’s statements about its independence to be inactionable puffery. Moody had declared independence and made a list of verifiable actions it executed to make sure it continued to stay independent. However, other specifics, the court said, were not actionable, including statements about the meaning of structured finance securities or that its structured finance revenues came from legitimate business practices.

The court said that the plaintiffs’ class action case survives the defendants’ motion to dismiss the lawsuit.

Credit Rating Agencies
It is the job of credit rating agencies to help manage financial market risk. CRA’s are responsible for publishing creditworthiness evaluations about their clients. These evaluations not only help in the assessment of credit risk but they are important for regulation.

Related Web Resources:
Moody’s Must Defend Investor Suit Over Independence, Bloomberg.com, February 23, 2009

Shareholder lawsuit vs Moody's allowed to proceed, CNBC.com, February 23, 2009

Moody's

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March 5, 2009

Wells Fargo, Goldman Sachs, JP Morgan Chase, Citigroup, UBS Securities, Bank of America, Moody’s Investment Services, and Fitch Ratings are Among Defendants Sued On Behalf of Wells Fargo Certificate Investors for Alleged Securities Fraud Violations

The Boilermaker-Blacksmith National Pension Trust is suing a number of investment banks, credit rating agencies, and underwriters, including Wells Fargo, WFASC, Morgan Stanley & Co., Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Bear Stearns & Co., Countrywide Securities Corp., Deutsche Bank Securities Inc., JPMorgan Chase Inc., Bank of America Corp., Citigroup Global Markets Inc., McGraw-Hill Cos., Moody's Investor Services Inc., and Fitch Ratings Inc., over allegations that they made false statements in the prospectus and registration statement for certificates that were collateralized by Wells Fargo Bank, NA. The lawsuit, filed on behalf of thousands of investors that bought the certificates from Wells Fargo Asset Securities Corp., accuses the defendants of violating the 1933 Securities Act by engaging in these alleged actions.

According to the securities fraud lawsuit, the defendants concealed from investors that Wells Fargo revised its underwriting practices in 2005 and became involved in high risk subprime mortgage lending. The complaint contends that WFASC and a number of defendants submitted to the Securities and Exchange Commision prospectus and registration statements representing that the mortgages were backed by certificates that were subject to specific underwriting guidelines for evaluating a borrower's creditworthiness. The plaintiffs contend that these prospectuses and registration statements were false because they neglected to reveal that the Wells Fargo-originated certificates were not in accordance with the credit, underwriting, and appraisal standards that Wells Fargo, per the companies, had supposedly used to approve mortgages.

The lawsuit also claims that because Wells Fargo decided to enter the subprime mortgage mortgage market in 2005, the investment bank had to take significant write-downs in 2008 because of its massive exposure to the subprime market and the WFASC certificates that these mortgages backed dropped significantly in value. The Boiler-Blaksmith fund reports that it lost about $5 million, which is more than half of what it invested.

Related Web Resources:
Read the Complaint

The Boilermakers National Funds

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Posted In: Bank of America , Broker Fraud , Citigroup , Credit Ratings Agencies , Credit Suisse , Deutsche Bank , Financial Firms , Fitch , J P Morgan - Chase , Moody's , Morgan Stanley

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November 26, 2008

SEC Adopts Rules to Streamline Mutual Funds Disclosures But Delays Making Decision on Credit Ratings’ Final Rules

In a unanimous vote, the Securities and Exchange Commission agreed to adopt rule amendments to improve mutual fund disclosures. This includes letting investors receive a summary prospectus written in simple English. The SEC also adopted revisions to the mutual funds’ registration form known as form N-1A, including amendments that let exchange-traded funds use summary prospectuses.

Summary Prospectus
The summary prospectuses, which are voluntary, may include important information about investment strategies and goals, past fund performance, risks, and fees. As long as the statutory prospectus, summary prospectus, and other essential data can be accessed online, mutual funds that send investors a summary prospectus will be fulfilling their prospectus delivery requirements. Key data, such as selling and buying procedures, financial intermediary compensation, and tax consequences must also be included. The SEC expects approximately 75% of all mutual funds to use summary prospectuses.

SEC Chairman Christopher Cox is calling the mutual fund amendments a huge step forward for investors. The amendments will go into effect on February 28, 2009. Form N-1A changes won't go into effect until January 2010.

On the same day these amendments were passed, however, the SEC announced that it was delaying making any final rule changes about credit rating firms and the credit ratings they issue. SEC Chairman Cox said the rating rule proposals package will be discussed on December 3. The Commission continues to maintain that credit rating agency rules remain a top priority for 2008.

However, the future of one proposed ratings provision may already be uncertain. The provision involves mandating that nationally recognized statistical ratings organizations reveal the data that they are using to come up with their ratings. The SEC planned to exclude this provision from the November meeting and it may not be included in the December talks.

Commenting on these recent developments, Stockbroker Fraud Attorney William Shepherd had this to say:

The SEC’s handling of mutual fund disclosure amendments and the proposed credit rating provisions demonstrate that despite the incredible damage to investors over the past eight years, the SEC remains the proverbial “fox in charge of the henhouse.” Led by Chairman Christopher Cox, a former Republican Congressman who is a champion of deregulation, the SEC has continued to provide a free reign to Wall Street, while acting in the worst interest of investors.

Making mutual fund information easier to read is not for the public's benefit. Instead, it is designed to put the onus of sales fraud on the investor—yet another example of “blame the victim.” Rather than maintain the requirement that mutual funds send a full prospectus to investors, these companies must now only provide a “summary," with the full disclaimer document available online.

Thus, when an investor complains that he or she was not given an accurate description of what was being purchased, or worse, was lied to about the risks, all the salesperson and firm needs to do is say: “Well, the prospectus was available to you, all you had to do was go online to read it.”

Of course, 99 our 100 investors will likely not do this. Furthermore, it has been a recent common practice for those who sell mutual funds to omit mailing the required prospectus but later say that they did.

As for the decision to delay making a decision on final rules for credit ratings—why take action now, Mr. Cox, when you have stood by as the credit rating agencies have fraudulently sold their ratings to borrowers for years, while you, the SEC, and Wall Street have known that the credit ratings were completely bogus?

Shame on you, Mr. Cox, shame on the Bush Administration for putting you in office, and shame on the greedy folks on Wall Street for using the SEC as a tool to defraud investors. For all Americans, I ask: “Where is the outrage?”

Mr. Shepherd is the cofounder of Shepherd Smith Edwards and Kantas, LLP , a securities fraud law firm that is nationally recognized for its ability to successfully help investors recoup their losses.


Related Web Resources:

SEC Adopts Fund Disclosure, Money Market Rules, CCH Wallstreet.com

US SEC delays action on credit rating agency rules, Reuters.com, November 19, 2008

Securities and Exchange Commission

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Posted In: Credit Ratings Agencies , Mutual Funds , SEC

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November 6, 2008

Moody’s, Standard & Poor's, and Fitch’s Assignment of High Credit Ratings to Mortgage-Backed Securities Contributed to the Financial Meltdown

At a hearing presided over by the House Oversight and Government Reform Committee in Washington DC, the executives of Moody’s, Standard & Poor's, and Fitch Ratings, the three top credit rating agencies in the country, were grilled about how their assignment of high ratings to mortgage-backed securities, while drastically underestimating their risks, contributed to the current financial crisis.

While the heads of the country’s three leading credit agencies—Standard and Poor’s Deven Sherman, Fitch Ratings’s Stephen W. Joynt, and Moody’s Raymond W. McDaniel—have called the mortgage-backed securities collapse “unprecedented” and “unanticipated and said that any errors the agencies' made were unintentional, internal documents reveal that the credit rating agencies knew that the ratings they were giving the securities were overvalued. It wasn’t until this past year, when homeowners began defaulting on subprime mortgages, that the credit ratings agencies began downgrading thousands of the securities.

Lawmakers are trying to determine whether the firms’ business model contributed to the conflicts of interests. Issuers pay the credit ratings agencies for evaluating securities. While the credit ratings agencies were giving mortgage-backed securities high ratings, the heads of the three leading credit agencies were earning $80 million in compensation.

At the hearing, former Moody’s credit policy managing director Jerome S. Fons testified that the agencies’ business model prevents analysts from placing investor interests before the firms’ interests. In one confidential document obtained by investigators, Moody’s CEO McDaniels is quoted as saying that bankers, investors and creditors regularly “pitched” the credit ratings agency. According to Frank L. Raiter, the former head of residential mortgage-backed securities ratings at Standard and Poor's, "Profits were running the show."

Investors depend on the credit rating agencies for independent evaluations. According to Congressman Waxman, the ratings agencies “broke this bond of trust,” while federal regulators failed to heed the red flags and protect investors.

Related Web Resources:

Credit Rating Agency Heads Grilled by Lawmakers, New York Times, October 22, 2008

Oversight Committee Hearing on Credit Rating Agencies and the Financial Crisis, Polfeeds.com, October 22, 2008

Committee on Oversight and Government Reform

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Posted In: Credit Ratings Agencies , Fitch , Moody's , Standard and Poor's

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August 10, 2008

Connecticut Attorney General Sues Moody’s, McGraw Hill, & Fitch Over Municipal Bond Issues

Connecticut Attorney General Richard Blumenthal has filed a lawsuit against Fitch Inc., Moody's Corp., and McGraw-Hill Companies. He is charging them with deliberately giving lower credit ratings to bonds issued by public entities, such as municipalities, in comparison to corporate and other kinds of debt.

Blumenthal says that by purposely giving artificially low credit ratings to municipalities, taxpayers have been forced to unnecessarily incur millions of dollars in higher interest rates and bond insurance. The lawsuit is part of a probe into bond insurers, credit rating agencies, and related entities and their potential violations, including those involving consumer protection and antitrust.

The Connecticut AG says that the state is holding the defendants responsible for “millions of dollars that have been illegally exacted from the state’s taxpayers.” The lawsuit, filed in coordination with Department of Consumer Protection (DCP) Commissioner Jerry Farrell, Jr., accuses the agencies of violating the Connecticut Unfair Trade Practices when they purposely left out or misrepresented material facts that lead bond issuers to buy bonds at higher interest rate.

Moody’s, Fitch, and McGraw Hill say they will combat the charges against them. McGraw-Hill, Standard & Poor’s parent company, claims that the state of Connecticut is using the lawsuit to dictate the kind of bond rate it gets. Moody says it will push to get the case dismissed.

The way that credit rating agencies deal with municipal bonds was addressed earlier this year in a letter sent to executives at Standard and Poor’s, Fitch, and Moody’s. Sent by the state treasurers of 11 US states, including Connecticut and California, and a number of municipal officials, the letter called on the firms to change their municipal bond rating system so it better reflects the bonds’ default risks. The treasurers say this would save municipalities billions of dollars in interest costs.

Credit-rating agencies sued by AG, ConnPost.com, July 30, 2008

Read the Complaint (PDF)

Department of Consumer Protection, Ct.gov

Ct Ag Richard Blumenthal

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Posted In: Credit Ratings Agencies

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April 4, 2008

The Association For Financial Professionals Wants SEC Chairman Cox To Push Harder For Reform Of Credit Rating Agencies

The Association for Financial Professionals is calling on Securities and Exchange Commission head Christopher Cox to use the SEC’s authority to push for the reform of the credit rating agencies.

In a letter from the AFP, CEO Jim Kaitz urged Cox to use the authority that Congress granted the SEC with the Credit Rating Agency Reform Act of 2006, which gives the SEC permission to hold the agencies accountable for providing timely and accurate ratings.

SEC Director of Trading and Markets Erik Sirri has said, however, that although the SEC can hold credit rating systems accountable for their ratings, it does not have the authority to interfere with the way that agencies assign ratings, which is a key issue that is impacting the current subprime mortgage market crisis.

The AFP, made of 16,000 financial professionals, wants the SEC to tackle the abusive and unfair practices that negatively affect the legitimacy of the credit rating system.

Sirri says the SEC is developing rules that could address the prohibition or disclosure of conflicts of interests at the agencies and the need to have different ratings for structured financial products and corporate securities. The SEC is also thinking about removing references to credit rating agencies from its own rules (there are more than 30 references) so market participants won’t rely on the agencies as much.

SEC based on the SEC’s examination of the nine SEC-registered credit-rating agencies or nationally recognized statistical rating organizations (NRSROs).

The securities fraud lawyers at Shepherd Smith and Edwards have more than a century of combined experience in securities law and the securities industry. We have helped thousands of victims of investor fraud recoup their losses.

Related Web Resources:

AFP Urges SEC to Fully Exercise Oversight Authority Over Credit Rating Agencies, PRNewswire, March 24, 2008

List of Credit Ratings Agencies, DefaultRisk.com

Association for Financial Professionals

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Posted In: Credit Ratings Agencies

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October 11, 2007

Merrill Lynch, Morgan Stanley and Bear Stearns Suffer Losses as Ratings Agencies Are Grilled over Sub-prime's

Merrill Lynch will soon report third quarter earnings which analysts have revised downward. An analyst at competitor Goldman Sachs says that Merrill’s earnings for the third quarter will be about $1.80 per share, down from $1.95 and lowered Merrill's stock price target to $94 from $108. The Goldman analyst predicted that Merrill will have $4 billion in write-downs, primarily from the fixed income division, resulting in a net loss of $1.5 billion for the quarter.

Other analysts' expectations were even even lower: Fox Pitt Kelton's analyst lowered earnings per share estimate for Merrill to $1.20, from a previous estimate of $1.91, “while noting that forecasting confidence is low in periods such as these.” He also expected the firm to experience $3.5 billion “in gross negative marks and realized losses” on leveraged loans, CDOs, and mortgages resulting in $2.2 billion in net losses and attributes the more positive net loss estimate to “$700 million in hedging gains; $500 million in loan fees; and $100 million in gains on liability marks.”

Morgan Stanley reported last week that it suffered a 17 percent drop in profit compared to the third quarter last year, earning $1.44, about ten cents below analysts’ estimates, with loan losses of $1 billion the culprit.

Bear Stearns has been center stage in mortgage related investment problems which have hit the investment community. That firm reported last week that it experienced a 61 percent drop in profits compared to the third quarter last year. This was mostly caused by multi-million dollar losses in mortgage focused hedge funds.

Meanwhile, Goldman Sachs, beat all analyst’s earnings per share predictions by more than $1.50, with $6.13 earnings per share in the third quarter, claiming that credit hedging had mitigated the firms loss. Lehman Brothers reported better than expected earnings of $1.54 per share despite $700 million in losses related to the credit crunch.

In the wake of the mortgage backed securities meltdown, Congress is investigating credit rating agencies over how and why ratings on such securities failed to reflect the danger. The SEC Chairman testified that the SEC is examining whether agencies including Moodys Investors Service and Standard & Poors were “unduly influenced” by issuers and underwriters that paid for the credit ratings. A union pension fund is suing the Moody’s credit rating agency over its “excessively high ratings” of bonds backed by subprime mortgages.

Shepherd Smith and Edwards represents investors nationwide in claims against securities firms. We have represented investors in more than 1,000 securities cases, including against Merrill Lynch, Morgan Stanley and Bear Stearns. To learn whether might assist you with a claim contact us to arrange a free consultation with one of our attorneys.

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Posted In: Bear Stearns , Credit Ratings Agencies , Merrill Lynch , Morgan Stanley

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September 24, 2007

SEC Investigates Credit Rating Agencies’ Policies Regarding Debt-Related Securities

The SEC and NY Attorney General Andrew Cuomo are conducting a probe of credit rating agencies to examine their policies regarding debt-related securities.

Standard & Poor’s (S & P), Fitch Ratings Inc., and Moody’s Investors Service have all been contacted by the SEC and questioned about their procedures and policies on rating collateral debt obligations (CDOs) and residential mortgage-backed securities (RMBS).

On September 5, before the House Financial Services Committee, SEC Market Regulation Director Erik R. Sirri announced that the probe was taking place. He also said that the commission was examining the advisory services that agencies might have provided to mortgage originators and underwriters, as well as rating performance, disclosures, and what the designated ratings signify.

Sirri also informed the committee members that the SEC was looking at two kinds of conflicts of interest at the agencies. One conflict deals with how agencies are paid—either by the customers that are rated or the underwriters. The second conflict deals with the significance of the ratings and the agencies’ methods.

The investigation could result in investors and others filing lawsuits against the firms. Also on September 5, Charles McCreevy, the European Union Internal Market Commissioner, said that the rating agencies worked too slowly to downgrade structured financial instruments. He also mentioned the conflicts of interest. He wants the roles of the agencies to be more clear-cut.

The New York Attorney General’s office has sent subpoenas to the agencies. S & P and Moody have promised to cooperate with the investigation.

If you are an investor that has lost money because of the inappropriate actions of a credit rating agency, a brokerage firm, or any other company or individual affiliated with the securities industry, you should speak with a securities litigation law firm that is experienced in successfully handling securities fraud cases and can help you recover your investment.

Shepherd Smith and Edwards has helped thousands of investors in the United States recover their loss. Contact Shepherd Smith and Edwards today for your free consultation.


Related Web Resources:

SEC to review role of credit rating agencies, CNN.com, September 7, 2007

Standard and Poor's

Moody's Investors Service

FitchRatings Inc.

Attorney General Andrew Cuomo, New York State

U.S. Securities and Exchange Commission

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Posted In: Credit Ratings Agencies

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