October 7, 2009

Make Credit Rating Agencies Collectively Liable for Inaccuracies, Proposes Lawmaker

House Financial Services subcommittee chair Paul Kanjorski introduced a new draft bill that proposes making credit ratings agencies collectively liable for inaccuracies. The agencies received a lot of heat when they failed to properly warn investors about the risks associated with subprime mortgage securities before the market fell.

One problem with the current system is that the firms issuing the securities are the ones paying the credit ratings agencies for rating the securities. Kanjorski’s draft bill lets investors pursue lawsuits against credit rating agencies that recklessly or intentionally did not examine key data to determine the ratings. He says that collective liability could compel the ratings agencies to provide reliable, quality ratings while providing the proper incentive for them to monitor each other.

Critics of the plan, including Republicans and industry executives, warned that collective liability could result in a slew of expensive complaints while decreasing competition even more in an industry that Fitch Ratings, Moody’s Investors Services, and Standard and Poor’s already dominate.

Kanjorski said that his proposal was a “start,” which comes as Congress intensifies its watch over the credit ratings agency industry and the Obama administration calls for stricter government oversight.

Credit ratings agencies are charged with issuing the creditworthiness ratings of securities and public companies. The ratings can impact a company’s ability to borrow or raise funds and determine how much mutual funds, banks, local governments, and state pension funds will pay for securities.

When home-loan delinquencies went up last year, the investments’ value dropped and the credit ratings agencies were forced to downgrade the ratings they gave to thousands of securities. Large banks and investment firms sustained hundreds of billions of dollars in losses because of the downgrades.

Meantime, two former Moody’s employees, former analyst Eric Kolchinsky and former senior vice president for compliance Scott McCleskey, are accusing Moody’s of misconduct, including engaging in conflicts of interest, knowingly inflating ratings, and failing to implement “meaningful surveillance of municipal securities” despite the credit ratings agency's statements to the contrary. Moody’s acknowledges misjudging the magnitude of the subprime mortgage collapse but says the allegations are “unsupported.”

Recently, the SEC proposed rules that would put a stop to conflicts of interest and allow for greater transparency for credit ratings agencies.

When the subprime mortgage market collapsed, many investor sustained massive financial losses. Our securities fraud law firm is dedicated to helping our clients recover those losses. Contact Shepherd Smith Edwards and Kantas, LLP today.

Related Web Resources:
Lawmaker seeks group liability for rating agencies, Business Week, September 30, 2009

The Role and Impact of Credit Rating Agencies on the Subprime Credit Markets, SEC.gov, September 26, 2009

House Committee on Financial Services

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

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September 16, 2009

Securities Fraud Lawsuit Against UBS AG Gets Added Steam with Employee Email Calling Collateralized Debt Obligations “Vomit”

UBS AG must post a $35.6 million bond, says Superior Court Judge John Blawie. Blawie says that hedge fund Pursuit Partners, LLC has sufficient evidence to pursue its securities fraud case claiming that the investment bank knew it was selling collateralized debt obligations that were toxic to institutional investors but did nothing to inform clients about the risks.

Blawie cited an e-mail written by a UBS employee that called the asset-backed securities “vomit.” Another e-mail noted that UBS was selling Pursuit CDOs that were “crap.”

The judge is letting the securities fraud complaint go forward without ruling on the case’s merits. Between July and October 2007, UBS sold the hedge fund CDOs valued at $40.5 million. Following the global credit crisis, there has been $1.7 trillion in losses and writedowns.

UBS employees marketed the CDOs to Pursuit while they were communicating with Moody’s Investors Services Inc. The credit-rating agency was tasked with reviewing UBS’s CDO investment grade ratings. Blawie says that the UBS employees found out after meeting with Moody’s that the CDOs would become “financial toxic waste.”

The securities fraud lawsuit claims that UBS new that Moody’s was going to change its rater’s methodology but that the investment bank continued to promote the CDOs as if the changes were not going to happen. When Moody’s tchanged its market-based formula to focus on where prices were going instead of current prices, the CDOs value immediately fell.

Pursuit contends that it suffered a $35.6 million loss as a result of UBS concealing the non-public data it had about the CDOs investment grade rating dropping. It also says that because UBS took two sides of a derivatives contract, the investment bank was able to liquidate the CDOs and did not sustain losses.

UBS denies the allegations and argues that Pursuit knew the risks that came with buying the CDOs. The investment bank claims that the hedge fund made the purchases at hugely discounted rates as high as 96%. UBS spokesperson said that one e-mail from Pursuit called the CDOs “sh__.”

Moody’s is also a defendant in the securities fraud lawsuit.

Related Web Resources:
Lawsuit Against UBS Resurfaces to Threaten Wall Street Itself, Seeking Alpha, September 15, 2009

UBS Hit by Another Lawsuit, Business Week, March 6, 2008

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Posted In: Collateral Debt Obligation , Credit Ratings Agencies , Financial Firms , Moody's , Securities Fraud , UBS

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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 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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