WASHINGTON (CN) – The SEC wants to shut down a small, independent ratings agency, though the SEC “condoned, excused, remained silent” or “very gently and gingerly reprimanded the large firms for conduct which corrupted the ratings process” and helped bring down the economy, Egan-Jones Rating Co. claims in Federal Court.
Egan-Jones, which has fewer than 20 employees and is paid by subscribers-not by the companies it rates-calls itself “the only independent Nationally Recognized Statistical Ratings Organization,” in the complaint.
It claims the SEC went after it on April 19, in a closed meeting, “details of which the SEC leaked to the press in advance,” but that the SEC let off the hook the giant ratings agencies, which often are paid by the companies they rate, though it’s the big firms that “were instrumental in creating inflated and erroneous AAA ratings” that contributed to the national financial crisis.
Egan-Jones Rating Co. and its founder Sean Egan asked the court to remove the SEC’s administrative proceeding to Federal Court, to prevent violations of due process, equal protection and the First Amendment.
“Egan-Jones is paid by its subscribers – not by the issuer,” the complaint states. “As a result, its sole economic motive is to provide its subscribers with the most timely, predictive, accurate and quality credit ratings in the industry.”
Egan-Jones says the SEC unfairly targeted it using alleged errors in its 2008 registration application to the SEC to rate two additional classes of securities.
“As this complaint makes unmistakably plain, a credit rating agency (‘CRA’) that the SEC chose to hold ‘accountable’ since 2008 is Egan-Jones – the one small independent ratings firm that actually warned the capital markets of dangerously over-rated ABS and CDO debt and has long been a valuable independent bellwether of true credit quality,” according to the complaint.
Egan-Jones claims that Congress has repeatedly asked the SEC to crack down on credit agencies, under the Credit Agency Reform Act and the Dodd-Frank Wall Street Reform Act, but the SEC refuses to go after the big players.
“The SEC historically has condoned, excused, remained silent or, at worst, very gently and gingerly reprimanded the large firms for conduct which corrupted the ratings process and negatively affected investors and the market,” Egan-Jones says.
It claims that SEC agents may be jockeying for jobs with the big credit agencies, making Egan-Jones, a small operation, an easier target for the congressionally mandated crackdown-and less detrimental to the SEC employees’ career prospects.
The complaint cites a reportfrom the Government Accountability Office about the SEC, and a cover letter in which the Comptroller General “noted ‘concerns about the potential impact on SEC’s ability to effectively carry out its mission when employees leave the agency to work for firms regulated by SEC. The report itself noted that ‘Academic researchers and citizen advocacy groups identified [as] challenges of
employee movement between SEC and the private sector’:
“‘Competing interests for current SEC employees: SEC Employees may be
influenced by the prospect of future employment opportunities to be more
lenient or favor prospective future employers while undertaking SEC actions,'” according to the complaint.
Egan-Jones says it was the first ratings organization targeted under Congress’ credit agency reform laws, and that this put a “disproportionately greater regulatory burden upon small, independent and subscriber-based firms.”
“The SEC’s asymmetric and disparate treatment of Egan-Jones is thus precisely contrary to Congress’ desire for additional competition in the ratings industry and for a reduction in the reliance on conflict-laden agencies, and is clearly contrary to the public interest,” according to the complaint.
Egan-Jones says the SEC’s administrative proceeding will not ensure that its due process and equal protection rights are honored. It seeks removal to Federal Court and an injunction preventing the SEC from acting against only Egan-Jones.
Egan-Jones is represented by David Wachen, with Shulman, Rogers, Gandal, Pordy & Ecker, of Potomac, Md.