Yesterday, Connecticut Attorney General Richard Blumenthal announced separate lawsuits against Moody’s and Standard & Poor’s, two of the nation’s largest credit rating agencies, for "knowingly assigning tainted credit ratings to risky investments backed by sub-prime loans." The lawsuits are "unique" to similar lawsuits filed on behalf of specific investors or pension funds, including Connecticut's own pending lawsuits against Moody's, Standard & Poor's and Fitch for allegedly giving bonds issued by municipalities artificially low credit ratings, in that they are sovereign enforcement actions brought under the Connecticut Unfair Trade Practices Act. Among the many allegations in the complaints, Connecticut AG Blumenthal stated that Moody’s and S&P’s "violated public trust" and that both companies' "lack of independence and objectivity has manifested itself in several ways," including by:
- "modif[ying] rating methodologies to make more money";
- "knuckl[ing] under pressure" to meet a competitor's rating or otherwise forgo revenue from the issuer; and
- "marginaliz[ing] its own compliance departments and even punish[ing] employees who raised concerns" about a lack of independence and objectivity.
As part of the Wall Street Reform and Consumer Protection Act (H.R. 4173) passed this past December, the House of Representatives introduced legislation to overhaul the regulatory framework for credit rating agencies, including, among other things, enacting provisions to prevent certain conflicts of interest between credit rating agencies and issuers of securities, and requiring the Securities and Exchange Commission to annually review credit rating agency practices. Credit rating agency legislation will likely be part of a separate financial regulatory overhaul bill expected to be released early next week by Senate Banking Chairman Christopher Dodd (D-MA).