The U.S. Justice Department and multiple states are discussing also suing Moody's Corp. for defrauding investors, according to people familiar with the matter, but any such move will likely wait until a similar lawsuit against rival Standard and Poor's is tested in the courts.
Inquiries into Moody's are in the early stages, largely because state and federal authorities have dedicated more resources to the S&P lawsuit, said the sources, who were not authorized to speak publicly about enforcement discussions.
Moody's spokesman Michael Adler and Justice Department spokeswoman Adora Andy declined to comment for this story.
Moody's in the past has defended itself against similar allegations, including a 2011 congressional report that concluded the major ratings agencies manipulated ratings to drive business.
The firm previously said Moody's takes the quality of its ratings and the integrity of the ratings process very seriously. It also said the firm has protections in place to separate the commercial and analytical aspects of its business.
The U.S. Justice Department filed a $5 billion lawsuit against S&P late on Monday and accused it of an egregious scheme to defraud investors in the run-up to the financial crisis, fueled by a desire to gain more business.
Shares of McGraw Hill Cos. Inc., which owns S&P, have fallen more than 25 percent since news of the lawsuits. Moody's shares have fallen about 15 percent, even though it was not named in any of this week's actions.
"Don't think Moody's is off the hook," said one law enforcement official.
Another rival, Fimalac SA's Fitch Ratings, is unlikely to face similar action, the sources said, since it is a much smaller player in the U.S. ratings industry. The firm also escaped the brunt of scrutiny from congressional investigators.
In a sign of just how high-stakes the battle is, S&P hired prominent defense attorney John Keker, who has represented everyone from cyclist Lance Armstrong to Enron's Andrew Fastow.
S&P said in a statement on Tuesday that the lawsuit is meritless and said it will vigorously defend itself.
A similar coordinated federal-state action against Moody's would follow lawsuits two states have already filed against the ratings firm. Connecticut, which led the states in this week's actions, sued Moody's and S&P in March 2010.
In January a state court in Hartford denied the last of the preliminary motions Moody's had filed to have the case thrown out. That case and the one against S&P are proceeding to trial in the second half of 2014.
Democratic Senator Richard Blumenthal of Connecticut, who as then-attorney general brought the cases against S&P and Moody's in 2010, said he found rampant abuse across the credit rating industry.
"The difference is one of degree and scale rather than essential modus operandi," Blumenthal said in an interview. "S&P is the largest and they did the most sizeable amount of ratings with the largest profits."
Those earlier cases and the more recent ones against S&P are based on a theory that the firms misled investors by stating that their ratings on mortgage products were objective and not influenced by conflicts of interest.
Instead, the lawsuits contend, the firms inflated ratings and understated risks as the housing bubble started to burst, driven by a desire to gain more business from the investment banks that issued mortgage securities.
Framing the cases in that manner steers clear of attacking individual ratings, which have largely been shielded under free speech protections. Instead, the focus is on proving false just one statement S&P made — that its ratings were objective.
The two state cases against Moody's present evidence that is similar to material in the complaints against S&P.
According to the Connecticut lawsuit, Moody's pledged in its code of conduct that its ratings are "not ... affected by the existence of, or potential for, a business relationship between (Moody's) ... and the Issuer ..."
"This representation by Moody's was false and Moody's knew it," the Connecticut complaint said.
In rating a collateralized debt obligation in 2006, for example, the issuer of the deal resisted a rating a Moody's analyst had determined by arguing that S&P had provided a more favorable rating. Following an exchange with managers, the analyst provided a recommendation that Moody's "reconsider the previously committed loss coverage levels," the lawsuit said.
The lawsuit does not say whether the levels were changed.
Moody's has said the Connecticut lawsuit is "without merit".
A 2011 Congressional report on the causes of the financial crisis singled out both Moody's and S&P for blame, because their ratings made the risky mortgage-backed securities that were central to the crisis seem like safe investments.
The report from the Senate's permanent subcommittee on investigations, led by Democratic Senator Carl Levin from Michigan, detailed specific pressures at Moody's to keep investment bank clients happy.
Managers were evaluated based on their ability to build market share, and former Moody's employees testified that employees were fired when they challenged senior management with a more conservative approach to rating the securities.
"The fear was real, not rare and not at all healthy. You began to hear of analysts, even whole groups of analysts, at Moody's who had lost their jobs because they were doing their jobs, identifying risks and describing them accurately," former Moody's senior vice president Mark Froeba testified to the subcommittee.
Despite similar evidence against both companies, people with knowledge of the rating agencies say authorities may have moved first against S&P because of a stronger paper trail against it.
Richard Greenfield of Greenfield & Goodman, who was part of a suit against Moody's with a settlement last year that included governance reforms and $4.95 million, said looking at the respective evidence, it does appear that there was more material against S&P.
"Here you've got a very, very good paper trail with S&P," he said. "If they are not totally smoking gun documents, they are collectively smoking gun documents."
The paper trail is important because the kinds of documents involved can help keep a judge from dismissing a case before it gets to trial, said Hillary Sale, a securities law and corporate governance expert and professor of law at Washington University in St. Louis.
The government's complaint against S&P includes numerous embarrassing emails, such as one in which an analyst parodies a Talking Heads song "Burning Down the House" to reflect the "boiling over" subprime market.
"When you have that kind of evidence that looks bad, you don't want to dismiss the case until you have more discovery," Sale said. That kind of a paper trail "helps you survive a motion to dismiss."
Legal experts say they expect the S&P case might simply be a prelude to more action.
"It may very well be that the government's testing their waters and they don't want to bite off more than they can chew," said Philip Hilder of Hilder & Associates in Houston, a former federal prosecutor. "Nobody should take these cases lightly."
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