SEC To Take Action Against Moody's

Moody’s Investor Service received on March 18. a “Wells Notice” from the Staff of the  Securities and Exchange Commission, in where the U.S, regulators inform about legal actions to be taken against the company. SEC are considering “Cease & Desist” proceedings against the rating agency, which means shutting down the business.

“MIS disagrees with the Staff that the violation of a company policy by a company employee renders the policy itself false and misleading and has submitted a response to the Wells Notice explaining why its initial application was accurate and why it believes an enforcement action is unwarranted.”

Moody’s Investor Service

This information is being disclosed in Moody’s first quarterly report of 2010, filed last night:

“March 18, 2010, MIS received a “Wells Notice” from the Staff of the SEC stating that the Staff is considering recommending that the SEC institute administrative and cease-and-desist proceedings against MIS in connection with MIS’s initial June 2007 application on SEC Form NRSRO to register as a nationally recognized statistical rating organization under the Credit Rating Agency Reform Act of 2006. That application, which is publicly available on the Regulatory Affairs page of, included a description of MIS’s procedures and principles for determining credit ratings. The Staff has informed Moody’s that the recommendation it is considering is based on the theory that MIS’s description of its procedures and principles were rendered false and misleading as of the time the application was filed with the SEC in light of the Company’s finding that a rating committee policy had been violated. MIS disagrees with the Staff that the violation of a company policy by a company employee renders the policy itself false and misleading and has submitted a response to the Wells Notice explaining why its initial application was accurate and why it believes an enforcement action is unwarranted.”

“In addition, the Company is facing litigation from market participants relating to the performance of MIS rated securities. Although Moody’s in the normal course experiences such litigation, the volume and cost of defending such litigation has significantly increased in the current economic environment.”

Here’s Moody’s Q1 SEC filing.

(See page 40)

Moody’s also reports:

“Following the events in the U.S. subprime residential mortgage sector and the credit markets more broadly over the last two years, MIS and other credit rating agencies are the subject of intense scrutiny, increased regulation, ongoing investigation, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with newly imposed regulatory standards. Moody’s has received subpoenas and inquiries from states attorneys general and other governmental authorities and is responding to such investigations and inquiries. Moody’s Wall Street Analytics unit is cooperating with an investigation by the SEC and the Department of Justice concerning services provided by that unit to certain financial institutions in connection with the valuations used by those institutions with respect to certain financial instruments held by such institutions.”


“From time to time, Moody’s is involved in legal and tax proceedings, governmental investigations, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.”

“Wells Notice”

A so called “Wells Notice” is a notifications issued by regulators to inform individuals and companies of completed investigations where infractions have been discovered.

A Well’s notice gives recipients the opportunity to explain any improprieties and convince regulators that forward movement on such actions is unnecessary.

“Cease & Desist”

A cease and desist (also called C & D) is an order or request to halt an activity, or else face legal action. The recipient of the cease-and-desist may be an individual or an organization.

The term is used in two different contexts. A cease-and-desist order can be issued by a judge or government authority, and has a well-defined legal meaning. In contrast, a cease-and-desist letter can be sent by anyone, although typically they are drafted by a lawyer.

A judge may issue a cease-and-desist order with the intent to halt an illegal activity. This prohibition is sometimes used as the outcome of a trial, in which case it is a permanent injunction against the activity. It can also be used as an emergency measure to prevent possibly irreparable harm, in which case it takes the form of a temporary injunction. An injunction against speech issued before it occurs (e.g. preventing a pending publication) is called prior restraint.

However, Many government administrative agencies also have the ability to issue cease-and-desist orders and frequently use them to halt the sale of unregistered or fraudulent securities, to halt banking practices that would possibly be dangerous to institutions and to enforce licensing statutes. These orders usually specify a period of time for the recipient of the order to request a hearing. If a hearing is not requested by the recipient in the given time, the cease-and-desist order becomes final and the agency has the ability to enforce its order in a court of law.

h/t Zero Hedge


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