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March 11, 2010
Connecticut AG Sues Rating Agencies for Their Role in Financial Meltdown
    by Robert Kropp

Lawsuit charges that Moody's and Standard & Poor's knowingly assigned inflated ratings to investments backed by sub-prime loans in order to earn lucrative fees.

Connecticut Attorney General Richard Blumenthal filed a lawsuit yesterday against two of the nation's largest credit rating agencies, charging that their "alleged misconduct enabled the worst economic downturn in the nation since the Great Depression."

The rating agencies—Moody's Investors Service and Standard & Poor's—assigned their highest credit ratings to structured finance securities containing significant credit risk in order to increase their own revenues, Blumenthal charged. In doing so, he said, "Moody’s and S&P violated public trust -- resulting in many investors purchasing securities that contained far more risk than anticipated and that have ultimately proven to be nearly worthless."

"The results have been catastrophic," Blumenthal continued, "Crippling the entire economy."

It is the responsibility of the ten companies registered with the Securities and Exchange Commission (SEC) as Nationally Recognized Statistical Rating Organizations (NRSRO) to determine the creditworthiness of financial products. Critics have seized upon the fact that NRSROs are most often paid for their ratings by the issuers of financial products themselves as evidence of a clear conflict of interest.

Last September, the SEC responded to the failure of rating agencies such as Moody's and Standard & Poor's to serve the interests of investors by unanimously approving proposed rule changes that would increase oversight of NRSROs by requiring them to disclose the history of their ratings, share information with other NRSROs seeking to rate products, and report annually on compliance reviews they have undertaken.

Effective February 1, the Commission adopted "rule amendments that impose additional disclosure and conflict of interest requirements on NRSROs in order to address concerns about the integrity of the credit rating procedures and methodologies."

In a press release announcing the lawsuit, the Attorney General charged that Moody's and Standard & Poor's modified rating methodologies to enhance their revenue, allowed the "ratings shopping" of issuers to influence the ratings they assigned, and failed to monitor the conflicts of interest inherent to the Issuer Pays business model.

Because investors rely on rating agencies to fulfill their obligations of independence and objectivity, the failure of Moody's and Standard & Poor's to do so violated the Connecticut Unfair Trade Practices Act, Blumenthal said.


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