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Exec Who Blew Whistle on Moody’s Ratings Sues for Defamation

A former executive at Moody’s Investors Service filed a civil suit in federal court today in Manhattan, alleging that the ratings agency defamed him after he flagged problems with their ratings. (Read the full complaint.)

During his time at Moody’s and after his employment there ended in 2009, Eric Kolchinsky, the plaintiff, said he raised concerns—several times to his employers, then to congressional investigators, and finally to a House panel last fall—about securities fraud and inflated ratings at Moody’s.

According to the complaint, Kolchinsky’s concerns were publicly countered by Moody’s with attacks and attempts to discredit him.  In September 2009, a Moody’s spokesman told the Wall Street Journal that Kolchinsky “refused to cooperate” with an internal investigation. A month later, The Wall Street Journal quoted CEO Raymond McDaniel calling his allegations “not supported by the facts” and “without merit.”

“Moody’s repeatedly and publicly published falsehoods about Mr. Kolchinsky, the tone and purpose of which was to cast dispersion [sic] on his credibility as a ‘whistleblower’ and to disgrace and ridicule his work and reports,” the complaint reads. “Moody’s claims were intended to make Mr. Kolchinsky seem like an unprofessional, disgruntled employee who files claims and performs faulty analysis, based on unmeritorious statements.”

The suit asserts that the attacks came despite an acknowledgement under oath from a Moody’s executive that the company had, in fact, adopted some of Kolchinsky’s ratings-methodology recommendations.

Responding to the suit, a spokesman from Moody’s told the Journal, “We are confident Mr. Kolchinsky has no basis for any suit against Moody’s.” We’ve also put in a call to Moody’s for their response. Moody’s has said in the past said that “Moody’s has a strict non-retaliation policy, and Mr. Kolchinsky was not disciplined or suspended because he raised complaints.”

Kolchinsky is seeking $15 million in damages, plus legal fees. 

As we’ve noted, Moody’s recently dodged enforcement action from regulators at the Securities and Exchange Commission, which had earlier warned the firm of the likelihood of a fraud lawsuit for failing to fix what it knew was an erroneous rating.

We’ve also noted that faced with the financial reform bill, Moody’s and other credit ratings agencies have warned bond issuers not to use their ratings in official documentation for bond sales, because if those ratings are included and turn out to be incorrect, agencies could be held liable. The ratings agencies contend that ratings are their best predictions of the future, and they shouldn’t be held liable if those predictions don’t pan out.

The big financial firms also played some role in the prevalence of inaccurate ratings. Emails released by congressional investigations earlier this year how banks sometimes pressured ratings agencies to give good ratings to lousy securities, and how agencies—fearing of losing market share—would often give in.

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