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Saturday, May 08, 2010 10:02:11 PM

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Moody's discloses Wells Notice from SEC

May 8, 2010, 11:52 a.m. EDT · Recommend · Post:

Moody's Corp. (MCO 23.36, -0.18, -0.76%) said late Friday that it received a Wells notice from the Securities and Exchange Commission in March alleging that it had made "false and misleading" statements submitted as part of an application to register as a nationally recognized statistical rating organization in 2008.

That registration is a stamp of approval that the SEC grants ratings agencies that allows them to conduct business.

Moody's, parent of Moody's Investors Service, said it disputes that allegation, arguing that one incident in which employees were accused of violating its standards of professional conduct doesn't make those standards "false and misleading."

In a statement Friday, Moody's said the Wells notice, which is an official notification from the SEC that a company is being investigated, relates to an issue it disclosed in 2008, when members of one European constant proportion debt obligations monitoring committee may have violated its code of professional conduct. "At the time, we reported the incident to regulators and initiated disciplinary proceedings against these employees, including terminations."

A Moody's spokesman added, "We have responded to all the requests on the matter by the SEC staff and will continue to do so."

Moody's is one of the three major rating agencies, along with Standard & Poor's and Fitch, that have been the target of criticism for missing risks, and giving top ratings to assets that ultimately collapsed in value. In July 2008, Moody's acknowledged that it had an error in the way it rated constant proportion debt obligations, or CPDOs, that would have lowered AAA ratings given to the 11 CPDOs to AA territory--or a reduction of one to three notches. But this didn't take into account "qualitative factors" that Moody's committees also consider in the firm's ratings.

Moody's found that some members of its CPDO monitoring committee in Europe considered factors other than credit--namely whether changing the rating would be embarrassing to Moody's or affect another market participant.

As part of the investigation, Moody's announced that an executive overseeing the division, Noel Kirnon, was leaving the firm following an internal investigation by law firm Sullivan & Cromwell LLP that began in May 2008 and focused on the CPDO error. Other people who worked for Kirnon also left after the internal investigation.

Moody's shares fell 1% to $23.12 in after-hours trading.

(Aaron Lucchetti and Serena Ng contributed to this article.)


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