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Monday, June 24, 2024 | Back issues
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Moody’s Whistleblower Case Moves Forward

MANHATTAN (CN) - A former managing director can pursue claims that Moody's fired him for threatening to report fraud in its ratings methodology, a federal judge ruled.

Ilya Eric Kolchinsky, a former managing director for Moody's derivatives group, claimed that he learned on Sept. 10, 2007 that the ratings agency used old methodologies that violated federal securities laws.

Kolchinsky claimed that his direct supervisor was "nonresponsive" to his concerns, so he took matter to Moody's Head of Credit Policy.

Less than 2 weeks later, Moody's issued a press release announcing new ratings methods, Kolchinsky said in his complaint.

He claimed he was later removed from the derivatives group, kept out of development meetings and his pay and bonuses were cut. He complained on Sept. 12, 2008 to Michael Kanef, Moody's chief regulatory and compliance officer, according to the Opinion and Order issued this week by U.S. District Judge Paul Crotty.

"Kanef investigated Kolchinsky's allegations, but Kanef had conflicts of interest since he oversaw the group that rated residential mortgage-backed securities and was involved in setting Moody's ratings policies for those securities," Crotty wrote in his 15-page ruling.

Kanef told Kolchinsky to direct any future complaints to Moody's lawyers - first, at Sullivan & Cromwell, then at Kramer Levin Naftalis & Frankel, according to Crotty's summary of the case.

Kolchinsky says he continued to raise "red flags" about Moody's ratings system to Moody's lawyers, and sent Kanef a memo expressing his concerns.

He says he was summoned to a meeting, which was postponed when he asked for an agenda "to review with his own counsel" ahead of time.

That meeting was postponed, and the next day, "Kolchinsky alleges that he was given 'an ultimatum of either speaking with a Kramer Levin attorney immediately or

being suspended.' In response, Kolchinsky stated that he was represented by an attorney and wanted her involved in the meeting with Kramer Levin. He was suspended by Moody's the same day. Kolchinsky contends that this suspension was a constructive termination because Moody's removed his name from the external directory; listed him as 'inactive' in the internal directory; told him that he would not be doing any work for, or on behalf of, Moody's; and ordered Kolchinsky to return company computers, cell phones, and identification cards. According to Kolchinsky, Moody's took these measures in retaliation 'for failing to cooperate with the so-called "independent investigation" by Kramer Levin.' Subsequent to his suspension, Kolchinsky was asked to testify before the House Committee on Oversight and Government Reform during its investigation of credit rating agencies in September 2009," according to Crotty's order. (Citations omitted.)

Crotty's order allows Kolchinsky to pursue his claim for retaliation, but dismissed related claims of defamation, tortious interference, and intentional infliction of emotional distress.

The parties will meet again on March 19 to plan the case.

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