Editor: David Reiss
Brooklyn Law School

September 17, 2013

Moody Misrepresentation

By David Reiss

Judge Daniels (SDNY) granted Moody’s motion for summary judgment in In re Moody’s Corporation Securities Litigation, No. 07 Civ. 8375 (Aug. 23, 2013). This is a big win for Moody’s, but I did find the following passage striking in its tone:

Moody’s own emphasis on the importance of its independence weakens its case for summary judgment on the issue of materiality. Moody’s 2005 and 2006 Annual Reports, as well as their Forms 10-K from the same timeframe, are replete with pronouncements of Moody’s independence and integrity.  For example, Moody’s stated in its 2005 Annual Report that it “is committed to reinforcing among all relevant stakeholders a sense of trust in the accuracy, independence and reliability of Moody’s products and services . . ..’ Likewise, in its Code of Professional Conduct dated June 2005, Moody’s stated that it “will use care and professional judgment to maintain both the substance and appearance of independence and integrity”, and that the ratings it issues “will not be affected by the existence of, or potential for, a business relationship between Moody’s (or its affiliates) and the Issuer (or its affiliates) or any other party . . ..” In light of the great lengths to which Moody’s has gone to tout its independence and integrity, it is inconsistent for Moody’s to simultaneously argue that a reasonable investor would not find such statements to be material. Moody’s thus fails to demonstrate that no reasonable jury could find the alleged misrepresentation at issue to be material. (13, citations omitted)

We are starting to see judges hold rating agencies to the standards they set for themselves (here, for example), although we have not yet seen a court hold one of them liable for violating them.  That may yet come as more of these cases wend their way through the courts.

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