Moody's escapes with slap on wrist in fraud investigation
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Moody’s has escaped a fine over an anti-fraud investigation by the Securities and Exchange Commission after a computer glitch affected ratings.
The US regulator has cautioned the rating agency about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.
The Report of Investigation says that because of uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct, the SEC declined to pursue a fraud enforcement action in this matter.
Robert Khuzami, director of the division of enforcement at the SEC, says: “Investors rely upon statements that rating agencies make in their applications and reports submitted to the Commission, particularly those that describe how the rating agencies determines credit ratings.
“It is crucial that rating agencies take steps to assure themselves of the accuracy of those statements and that they have in place sufficient internal controls over the procedures they use to determine credit ratings.”
According to the report, an MIS analyst discovered in early 2007 that a computer coding error had upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for certain constant proportion debt obligation notes.
Nevertheless, shortly thereafter during a meeting in Europe, an MIS rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact MIS’s business reputation.
In the Report of Investigation, the Commission makes clear that credit rating agencies registered with the SEC must implement and follow appropriate internal controls and procedures governing their determination of credit ratings, and must also take reasonable steps to ensure the accuracy of statements in applications or reports submitted to the SEC.
