No rendition for Moody's European unit up to its nexus in fraud-like behaviour

Moody's Investor Services (MIS) was born of an American, John Moody, around the turn of the Nineteenth into the Twentieth Century. And, my, how it has grown.

According to its resume, "Moody's is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets. Moody's Corporation (NYSE: MCO) is the parent company of Moody's Investors Service."

The Securities Exchange Commission regulates American companies, especially credit reporting agencies. Moody's became a nationally recognized statistical rating organization ("NRSRO"), registered with SEC, after the middle of 2007. But just prior to that time, Moody's European operations bad a boo-boo. A not insignificant one.

But one apparently safely separated from the SEC by the Atlantic Ocean. That is the story told by the SEC itself in its Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Moody's Investors Service, Inc. released August 31st:

In the summer of 2006, MIS began developing a methodology for rating notes issued by a newly created CPDO.

The rating committee responsible for the credit ratings of the CPDO notes met in France and the United Kingdom. The CPDO notes were arranged by European banks and marketed in Europe.

Because CPDO notes were new instruments, MIS had no existing model for use in rating them. MIS created a model and in September 2006 gave the notes issued by the newly created CPDO issuer an Aaa credit rating. By the end of 2006, MIS had issued credit ratings for notes issued by an additional eleven CPDO issuers. The notes of all twelve CPDO issuers were marketed in Europe.

In January 2007, an MIS analyst in New York, assisting on a CPDO deal with a United States investment bank, was asked to determine why the MIS CPDO model was not generating the same output as the investment bank's model.

Upon examination, the analyst discovered a coding error in the MIS model. The coding error upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for notes issued by eleven CPDO issuers.

The CPDO notes with affected credit ratings had a combined notional value of just under $1 billion.

MIS subsequently held several internal rating committee meetings in France and the United Kingdom to address the coding error.

MIS corrected the coding error on February 12, 2007, but made no changes to the outstanding credit ratings for CPDO notes at that time.

Internal e-mails show that committee members were concerned about the impact on MIS's reputation if it revealed an error in the rating model. The committee was comprised of senior level staff, including two Team Managing Directors, two Vice President-Senior Credit Officers, and a Vice President-Senior Analyst.

In declining to downgrade the credit ratings, the committee considered the following inappropriate non-credit related factors:

>(i) that downgrades could negatively affect Moody's reputation in light of ongoing negative media focus in Europe on Moody's Joint Default Analysis;
>(ii) that downgrades could impact investors who relied on the original ratings; and
>(iii) the desire not to validate the criticisms of Moody's ratings of CPDOs that had been made by a competitor and covered in the local media.

The actions of the rating committee that evaluated the affected credit ratings for the CPDO notes did not comply with MIS' own Core Principles.

Members of the rating committee involved in the monitoring of CPDO ratings allowed concerns regarding Moody's reputation and other non-credit related considerations to influence decisions not to downgrade the affected CPDOs.

Further, we conclude that, in early 2007, members of the European rating committee believed they could violate MIS's procedures without detection

[How-ever,] Because of uncertainty regarding a jurisdictional nexus to the United States in this matter, the Commission declined to pursue a fraud enforcement action.