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Sunday, June 16, 2024 | Back issues
Courthouse News Service Courthouse News Service

Hydra-Headed Mortgage-Crisis Suit Averted

MANHATTAN (CN) - Moody's former managing director needs to focus his allegations against the ratings agency to have a viable lawsuit, rather than a "Homeric 'Catalogue of Ships' for the 2008 financial crisis," a federal judge ruled Thursday.

Ilya Eric Kolchinsky brought the suit under seal in 2012, accusing Moody's of ignoring its own analyses to inflate its ratings "thousands" of collateralized debt obligations tranches.

An amended version of the whopping 107-page original complaint said Moody's submitted more than 466,700 false ratings to the government.

Kolchinsky has dropped an allegation that Moody's constructively fired him for his criticism, but he still accuses the ratings service of defrauding the government in court and on Capitol Hill.

He has testified before the House Committee on Oversight and Government Reform, the Senate Permanent Subcommittee on Investigations, and the Financial Crisis Inquiry Commission.

With the government electing not to intervene in the New York case, Kolchinsky's attorneys alleged five different ways Moody's conduct violated the False Claims Act.

Prevailing on a qui tam lawsuit allows a whistleblower, in this case, Kolchinsky, to recover triple damages for frauds on the government.

U.S, Judge William Pauley III nevertheless rejected each of the former employee's theories on Monday, comparing Kolchinsky's lawsuit to Homer's "Iliad," in which the Greek epic poet listed the contingents of the Achaean army who sailed to Troy.

Pauley runs with the metaphor in describing Kolchinsky's "hydra-like allegations."

"Like that tome, Kolchinsky's amended complaint has grown by accretion, recounting each new episode that roiled the financial markets over the past decade," he wrote.

The dismissal of the complaint came down to the simple distinction, however, between defrauding the government and using the government as a vehicle to commit fraud on a private entity.

Kolchinsky "makes no allegation that Moody's sought any money from the government," the judge noted.

"Rather, he alleges that Moody's fraudulently obtained a government endorsement and later used that special status to submit false claims to private entities for payment," the 18-page opinion states. "But government licensure does not transform credit ratings issued to private entities into false claims to the government for payment."

Only one of Kolchinsky's claims comes close to reaching this bar, Pauley wrote.

Kolchinsky said certain government agencies have paid subscriptions to Moody's Ratings Delivery Service, but his current complaint does not name any of the agencies patronizing this service.

Pauley is giving Kolchinsky a chance to revise his complaint with this information.

Moody's spokesman Michael Adler said the company is "pleased" with the dismissal.

Kolchinsky's lawyers did not immediately respond to email and telephone requests for comment.

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