Egan-Jones Ratings Co. and its founder, president and owner Sean Egan were named as Respondents in a Commission administrative proceeding. The Order alleges that the firm submitted a false and misleading registration statement to the SEC, made material misrepresentations in other filings and violated certain record keeping and conflict of interest provisions. In the Matter of Egan-Jones Ratings Company, Adm. Proc. File No. 3-14856 (April 24, 2012).
Egan-Jones is a subscriber based credit rating agency. Sean Egan is its founder and president and at times its sole analyst for issuing credit ratings. The firm submitted an application on Form NRSRO on August 16, 2007 for registration for three classes of credit ratings: issuers of financial institutions, brokers and dealer; issuers of insurance companies; and corporate issuers.
The firm submitted a second application on July 14, 2008. This registration was for two classes of credit ratings: issuers of ABS and issuers of government securities. A supplement was filed in September 2008.
Like the first application, the second was on Form NRSRO. That form requires that the registrant for each class of ratings: 1) state the approximate number of credit ratings that it had outstanding in that class; and 2) identify the approximate date it began issuing credit ratings as a credit rating agency in that class on a continuous basis. The Form also requires that the applicant have been issuing ratings as a credit rating agency for at least three years and that those ratings be available on the internet or through another readily accessible means for free or for a reasonable fee. The application has to be supported by certifications from two qualified institutional buyers who attest that they have “seriously considered” the ratings of the applicant for at least three years in the course of making investment decisions.
Egan-Jones, in its July 2008 application, represented that it had 150 outstanding credit ratings on issuers of ABS and 50 on government securities. Later the firm revised those numbers down to, respectively, 14 and 9. The firm also represented that it had been issuing ratings on ABS on a continuous basis for issuers of ABS since December 2005 and on issuers of government securities since April of that same year.
The Order alleges that the representations in Form NRSRO and the supporting attestations are false:
- At the time of the July 2008 application the firm had never issued credit ratings on issuers of ABS on the internet or through another readily accessible means;
- The firm had no contemporaneous reports, work papers, or other reports to show it had issued credit ratings on ABS or government issuers prior to July 2008;
- Mr. Egan, as the primary and at times sole research analyst for the firm knew the firm had not been issuing ratings on the two claimed issuers on a continuous basis since 1995;
- The certifications from the qualified institutional buyers were inaccurate because they had never received ratings from the firm on issuers of ABS or government securities.
The Order also alleges that the firm, aided and abetted by its founder:
- Made false statements in submissions to the Commission regarding the securities holdings of its subscribers;
- Failed to enforce its policies on conflicts which precluded employees from participating in determining the credit ratings for an issuer whose securities they owned by permitting one analyst to issue ratings on seventeen issuers while holding their securities and another analyst in one instance;
- Failed to make or retain a record of the procedures and methodologies used to determine credit ratings;
- Failed to make or retain certain internal records regarding its outstanding ratings; and
- Failed to retain emails regarding its determination of credit ratings for eighteen months after it became registered.
The Order alleges violations of Exchange Act Sections 15E(a)(1), 15E(b)(2), 15E(h)(1) and 17(a), and the related rules. A hearing will be held on the allegations by the Division.