Whistle-Blower Seeks Billions From Moody’s

MANHATTAN (CN) - A former manager sued Moody's in a qui tam complaint, claiming the ratings service cost the federal government billions of dollars by falsely evaluating mortgage-backed securities and collateralized debt obligations before the financial crisis.

Ilya Eric Kolchinsky sued Moody's on Feb. 24, 2012, in a sealed complaint.

The complaint was unsealed on May 30 this year, after the United States declined to intervene.

According to the 107-page complaint: "Between 2004 and 2007, Moody's issued credit ratings for tens of thousands of U.S. residential mortgage backed securities ('RMBS') and collateralized debt obligations ('CDOs'). Motivated by Wall Street firms; willingness to pay hundreds of millions of dollars in fees to obtain investment-grade credit ratings, and Moody's single-minded desire to increase its share of the lucrative and increasingly competitive CDO and RMBS markets, Moody's issued its highest rating, Aaa, and similarly positive investment grade credit ratings, for the vast majority of those RMBS and CDO securities. Unbeknownst to investors, these ratings were not the product of independent, objective calculations, but rather the result of concealed conflicts of interest and Moody's reckless profit-maximization policies. Moody's concealed its profit-driven ratings inflation practices by its certification to the SEC to the contrary - that its rating reflected legitimate practices and policies. Moody's certifications were a lie."

Moody's continued to lie as delinquencies and defaults increased "at an alarming rate" in 2006, Kolchinsky says, and did not reverse course until the meltdown began, in October 2007, whereupon it "began downgrading at record numbers hundreds and then thousands of its RMBS and CDO ratings, some less than a year old," according to the complaint.

Kolchinsky claims that he wrote higher-ups at Moody's about their "unethical and illegal conduct," for which he was "constructively discharged."

He seeks disgorgement of unjust profits, and damages for violations of the False Claims Act.

He is represented by Stephen Weiss with Seeger Weiss.

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