TRENTON – Attorney General Christopher S. Porrino announced today that Moody’s Corporation, Moody’s Investors Service, Inc. and Moody’s Analytics, Inc. (collectively Moody’s) will pay the State $15.2 million as part of a global settlement resolving allegations that Moody’s violated state and federal laws by misleading consumers about its independence and objectivity in the rating of structured finance securities.
Under the global settlement, Moody’s will pay a total of $863.8 million to 21 states (including New Jersey), the District of Columbia and the U.S. Department of Justice. The settlement resolves allegations that Moody’s harmed consumers by falsely claiming to be an independent source of analysis on structured finance securities when, in fact, its ratings of the securities were driven by its own desire for revenues, as well as favoritism toward investment banking clients who issued the securities and paid the company related fees.
Moody’s alleged misconduct began as early as 2001 and became particularly acute between 2004 and 2007. Structured finance securities – including residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) – derive their value from the monthly payments consumers make on their mortgages. These securities, particularly those backed by subprime mortgages, were at the center of the nation’s financial crisis.
“This is an important settlement because it holds Moody’s accountable for unscrupulous conduct that harmed New Jersey consumers of Moody’s services and others who placed their trust, and dollars, in a trusted name,” said Attorney General Porrino.
“Moody’s sought – and obtained – investor confidence by assuring consumers its ratings and analysis were objective and unbiased, but those assurances proved to be empty,” Porrino said. “In reality, the company acted on behalf of its own, profit-driven interests, and on behalf of favored investment banking clients whose fees provided Moody’s with a lucrative revenue stream.”
Moody’s represented to consumers that its Aaa ratings carried a specific level of risk, and the investigation found evidence that Moody’s altered its process so that the Aaa rating represented a greater risk than Moody’s disclosed to investors and consumers.
The investigation also found evidence that Moody’s gave in to pressure from large banking institutions – some of the company’s most influential repeat customers -- who paid Moody’s millions of dollars to rate the mortgage-backed securities. The banks needed top-level ratings in order to sell their mortgage-backed securities to institutional investors.
In addition to the monetary settlement, Moody’s has agreed to (1) a detailed statement of facts in connection with the way it rated RMBS and CDOs leading up to the financial crisis and (2) significant compliance terms – including an annual certification by the CEO of Moody’s Corporation, which will be provided to New Jersey every year for the next four years, certifying that Moody’s is following certain compliance requirements.
Together with a similar agreement involving Standard & Poor’s in February 2015, the Attorney General’s Office has now recovered more than $36.5 million through settlements with credit rating agencies that resolved allegations of deceptive conduct.
“The alleged conduct in this (Moody’s) case is the kind of thing that harms consumers, engenders mistrust in investing, and can contribute to financial collapse on a larger scale,” said Attorney General Porrino. “Going forward, we remain committed to ensuring that financial institutions act with integrity, and to keeping the New Jersey financial marketplace free from deception.”
New Jersey was represented in the Moody’s matter by Assistant Attorneys General Brian F. McDonough and John M. Falzone, Deputy Attorney General and Consumer Fraud Prosecution Section Chief Lorraine K. Rak, Deputy Attorney General and Securities Fraud Prosecution Assistant Section Chief Joshua I. Sherman, and Deputy Attorneys General Mark E. Critchley, Erin M. Greene, and Jesse J. Sierant.
New Jersey also was represented by Betsy A. Miller, Joshua S. Devore, and Genevieve Fontan of the law firm of Cohen Milstein Sellers & Toll, PLLC.
Follow the New Jersey Attorney General’s Office online at Twitter, Facebook, Instagram & YouTube. The social media links provided are for reference only. The New Jersey Attorney General’s Office does not endorse any non-governmental websites, companies or applications.