Suit Says Moody’s Directors Profited as Markets Failed

MANHATTAN (CN) - Directors of Moody's made millions selling their company stock at inflated prices while the credit rating agency handed out favorable ratings like candy even as the housing and credit markets collapsed, shareholders claim in a class action in Federal Court.

In a claim that quotes liberally from recent media accounts of the financial crises, Moody's stockholders blame current and former directors of the statistical rating organization for "massive mismanagement" of the century-old company during the past five years.

The complaint places the blame for the company's - and the nation's - financial disasters on Moody's increased interest since 2004 in securitized subprime mortgages, credit default swaps and other complex financial instruments.

"In a reckless quest for market share in a market where issuers select and pay for the most favorable rating, Moody's inflated credit ratings for billions of dollars worth of mortgage-backed securities, CDOs and related instruments," the lawsuit claims.

After giving many of these exotic financial instruments Triple A ratings for several years - signaling to investors that they were safe places to put money - in July 2007 Moody's downgraded its ratings on some 5,000 mortgage-related securities, wiping out many investors and "triggering a chain reaction that continues even now to spread, affecting not only the United States financial markets but markets all over the world," the complaint states.

Even as banks, pension funds, mutual funds and other investors were losing billions on downgraded securities that Moody's had rated as safe, the company's directors were making millions selling their personal stock, the lawsuit claims.

The company's current CEO and Chairman, Raymond McDaniel Jr., has made more than $8 million since 2006 selling Moody's stock, according to the complaint.

During the same period, McDaniel and other directors had to spend $3.3 billion of the company's cash to repurchase stock "at prices artificially inflated by their false public assurances of the integrity and rigor of the company's ratings process, while reaping millions of dollars from sales of their personal holdings of Moody's stock," shareholders say.

The company's missteps came about during a "race to the bottom" in which Moody's fought two other rating agencies for market share and the quick, easy profits available in the structured finance market, according to the complaint. By 2006, as the collapse of that market loomed on the horizon, the company's structured finance revenue grew by 24 percent, accounting for 54 percent of Moody's rating revenue and bringing in nearly $1 billion. Yet that same year, the company's chief economist, Mark Zandi, told The New York Times that "the environment feels increasingly ripe for some type of financial event," the lawsuit states.

The class seeks a jury trial. It is represented by Richard Greenfield with Greenfield & Goodman.

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