This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Ratings Firms Exposed to Fraud: Expert

NEW YORK ( TheStreet) -- The Securities and Exchange Commission has a good shot at proving civil fraud charges against Moody's Investors Service (MCO) and McGraw Hill Cos. (MHP), according to one of the nation's most prominent securities law experts.

The SEC is looking at "whether the ratings companies committed fraud by failing to do enough research to be able to rate adequately the pools of subprime mortgages and other loans," underwritten by big banks like Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS) and JPMorgan Chase (JPM) that blew up, causing the credit crisis, according to a report in The Wall Street Journal Friday.

Columbia University Securities Law Professor John Coffee argues the SEC may have a case, stating in an email exchange that evidence compiled by several economic researchers shows strong evidence the ratings firms systematically engaged in grade inflation.

"That kind of adjustment does sound like fraud, whereas passivity can be defended as simply non actionable negligence. Thus, the strength of such a suit will likely depend on what is alleged," Coffee writes. "It is important to go beyond charges of inactivity and assert (as the economic evidence seems to show) that they deviated from their own models to inflate their ratings."

Investors appear to be taking the report seriously, as shares of both Moody's and McGraw Hill, which have been strong performers this year, were down sharply Friday morning.

Despite the hot water the ratings agencies could be in, they are better off with the SEC, Coffee said in a follow-up phone conversation, than they would have been if the U.S. Justice Department had brought the case. That's because "the SEC tends to settle cheaply," he argued.

"I think that there may have been some jurisdictional rivalry and probably a compromise in the SEC pursuing the case because it would not make sense to have everyone piling on and suing the rating agencies. If I were the defendants, I would prefer to be sued by the SEC than the Department of Justice--even civilly," he said.

Calls to spokespeople at the SEC, the two ratings agencies and the Justice Dept. were not immediately returned.

-- Written by Dan Freed in New York.

Readers Also Like:


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,987.51 -61.49 -0.36%
S&P 500 1,985.54 -11.91 -0.60%
NASDAQ 4,567.5980 -24.2080 -0.53%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs