According to the Wall Street Journal, the U.S. Department of Justice has been meeting with ex-Moody’s Investor Service (MCO) executives to talk about the way the credit ratings agency rated complex securities prior to the 2008 financial crisis. Sources say that the probe is still in its early stages and it is not certain at the moment whether the government will end up filing a bond case against the credit rater.
DOJ officials are trying to find out whether the company compromised its standards in order to garner business. The government’s focus is on residential mortgage deals that took place between 2004 and 2007.
Moody’s and credit rating agency Standard and Poor’s gave triple A ratings to the deals so that even conservative investors were buying the subprime loan-backed securities. The investments later proved high risk. When the housing market failed, the bond losses cost investors billions of dollars.
The attorneys general from Mississippi and Connecticut have already filed mortgage fraud lawsuits against Moody’s but they decided to put the case on hold while resolving similar lawsuits against S & P.
The DOJ, which filed its case against S & P in 2013, accused the credit rating agency of falsely claiming that it had issued independent and objective ratings that were not impacted by conflicts of interest even though it allegedly inflated mortgage securities ratings, including collateralized debt obligations and mortgage-backed securities, to get on the good side of Wall Street banks. The banks paid the credit rater to rate the deals, which the DOJ said placed improper influence on the ratings of the securities. S & P disagreed with the government’s contentions and fought the claims.
Now, the DOJ is expected to announce a mortgage bond settlement of over $1.37 billion with Standard and Poor’s. The resolution did not come easily. For awhile the credit rating agency called the case a retaliatory act because S & P had reduced the United States’ own credit rating in 2011. Sources say that now, as part of the deal, S & P will admit that it has not found evidence of retaliation by the government. The deal will also likely resolve cases made by over a dozen states.
Meantime, the U.S. Securities and Exchange Commission is expected to file a case against Barbara Duka, who is S & P’s ex-head of commercial mortgage ratings. Also, the New York Times says that the DOJ is now looking at Morgan Stanley (MS) over allegations that it duped investors into purchasing troubled mortgage investments.
Unfortunately, many investors sustained losses in mortgage-backed securities during the financial crisis because of unsuitable investment recommendations made by firms and their representatives. The unreliable credit ratings issued for securities that were not, in fact, low risk has been a huge issue of contention.
Our mortgage-backed securities fraud lawyers represent investors with losses that they wish to recover. Contact the SSEK Partners Group today.
Justice Department Investigating Moody’s Investors Service, The Wall Street Journal, February 1, 2015
DOJ targeting Morgan Stanley’s relationship with subprime lender: NYT, Reuters, December 30, 2014
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Moody’s Reduces American Realty Capital Properties Credit Rating to Junk Status, REIT’s Founder Nicholas Schorsch Steps Down, Institutional Investor Securities Blog, December 16, 2014
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