Attorney General Josh Hawley and Secretary of State Jay Ashcroft announced today that an $864 million settlement has been reached with Moody’s Corporation, Moody’s Investors Service, Inc., and Moody’s Analytics, Inc. (collectively “Moody’s”), by the U.S. Department of Justice, 21 states and the District of Columbia. These efforts were led by the attorneys general of Connecticut and Mississippi in partnership with the USDOJ.
The landmark settlement is the culmination of an investigation into Moody’s conduct and its representations of independence and objectivity in the rating of structured finance securities. 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 financial crisis.
“This settlement is a major win for the people of Missouri,” Hawley said. “Missouri’s businesses and economy suffered at the hands of deceptive and reckless credit rating agencies and justice has now been served.”
“We are very pleased to have been part of this nationwide effort and achieved such a large payment of $12.2 million to the State of Missouri,” said David M. Minnick, Commissioner of Securities for Secretary Ashcroft. “Just as important, though, is that the settlement seeks to provide protections for investors who rely on ratings services. Our continued focus is investor protection for all Missourians.”
Despite repeated statements emphasizing its independence and objectivity, Moody's allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients, and assigned inflated credit ratings to toxic assets packaged and sold by the Wall Street investment banks. This alleged misconduct began as early as 2001, and became particularly acute between 2004 and 2007.
Moody’s represented to consumers that its Aaa rating 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 big banks, which were powerful, repeat customers that paid Moody’s millions of dollars to rate these securities. The banks needed Aaa ratings in order to sell these securities to institutional investors, such as pension plans and retirement plans.
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 Missouri every year for the next four (4) years, certifying that Moody’s is following certain compliance requirements.
Together with the similar settlement against Standard & Poor’s in 2015, the Attorney General’s Office has recovered more than $33.5 million from the credit rating agencies to resolve allegations of deceptive conduct.
The state of Missouri was represented by Joyce Yeager, Anne Schneider, Amy Haywood, Caleb Aponte and Nathan Aquino in this matter.