As Zero Hedge first pointed out on Saturday, Moody's is in very big trouble - in its 10Q, in the very last paragraph of the very last page, the company indicated that on March 18, it had received a Wells Notice and a recommendation by the SEC to pursue a Cease and Desist order against the agency's NRSRO status, in effect killing its business model. This was not lost on the market, which punished Moody's stock by 10% yesterday even as every other stock went vertical. When all is said and done the 10% could well become 100%, and as far as the market is concerned nobody would shed a tear: the conflicted rating agency model is long dead, and the independent third party vendors are the only ones that add any actual value at this point. However, far more interesting are the actions by Moody's CEO Raymond McDaniel and key shareholder and kindly grandfather, Warren Buffett, both of whom sold millions worth of Moody's share and stock, the day of, and just after, the Wells notice receipt. The New York Times has reported that Buffett, who recently has not had a problem commenting on pretty much everything, and was vociferously defending not only arch monopolist Goldman Sachs at his annual ukulele outing in Borsheims, but Moody's as well, has had "no comment" on his sales. Perhaps it is time for someone to take Mr. Buffett to task, instead of just to his word: sure, it could be just a coincidence... or three - he sold over $30 million in MCO stock on March 19, March 24 and March 26. Or it might not. However, now that it has become far too clear that nobody in the finance business has a shred of integrity and honesty left, perhaps it is time an independent and impartial jury to decide if any impropriety based on material, non-public insider information, was committed.
From the New York Times:
According to regulatory filings, Raymond W. McDaniel Jr., Moody’s chief executive, sold or exercised options worth about $4.3 million on March 18, the same day that his company received the Wells notice.
Moody’s shares closed at $29.66 the day of Mr. McDaniel’s sale, near their high of $30.54 so far this year. Moody’s shares have traded as low as $18.50 over the last 52 weeks. On Monday, the shares fell as much as 12 percent, but finished the day down 7 percent at $21.77.
Moody’s said Mr. McDaniel’s sales in March were part of a prearranged plan established about a month before the Wells notice arrived.
Berkshire Hathaway, the investment vehicle for Warren E. Buffett and a major Moody’s shareholder, also sold more than one million shares worth more than $30 million on March 19, March 24 and March 26. The sales represent a small portion of Berkshire’s overall stake in Moody’s. Berkshire did not return a call seeking comment about its sales. A spokesman for the S.E.C. would not comment on Moody’s disclosure.
And an even bigger problem for Moody's is that the Wells Notice, with its open ended outcome, comes at a horrible time for the firm - in a book straight out of Goldman Sach's future, Moody's is now struggling to even keep up with all the lawsuits that are hitting it not daily but hourly. It will be difficult for the SEC action not to precloud the judgment of any of a variety of juries that will be asked to opine on just how potentially criminal Moody's actions may have been in allowing toxic sludge to be rated AAA+++ for a good 5 years, and, according to some, to allow the credit bubble to reach its historic proportions.
According to Moody’s, the S.E.C. was prompted by a report in May 2008 in The Financial Times. The article stated that in 2007, members of a committee that oversaw a certain type of European derivative — called constant proportion debt obligations — knew that some of the products had been given inflated ratings because of a problem in the company’s risk modeling software.
Without that problem, The Financial Times reported, the bonds would have received ratings as many as four notches lower. Moody’s corrected the software error, but the bonds maintained their Triple A ratings until January 2008.
Moody’s hired an outside law firm to investigate the matter, and subsequently took disciplinary actions that included terminations, according to Mr. Adler. He declined to provide further detail.
In June 2007, the company submitted an application to become a nationally recognized statistical rating organization, as required by S.E.C. regulations. That application included a code of conduct. The Wells notice essentially says that because Moody’s employees had violated that code, the application included a false and misleading statement.
What the S.E.C.’s action will mean for lawsuits against the ratings agencies is unclear, though Adam Savett of RiskMetrics, which has tracked the litigation, predicts that it might serve as a thumb on the scale for plaintiffs’ lawyers.
“Judges are human and when they look at the facts of a case, if this Wells notice turns into an actual lawsuit, it will become part of the gestalt when judges weigh whether to allow cases to go forward,” he said. “Then again, if you take a step back, the judges in these cases have been focusing very narrowly on the facts before them, taking each case on its merits, teasing out the true culpability. There was a concern in the business community initially that there would be mass lynchings for the ratings agencies in courts across the country. But that has not happened.”
If we were betting men, we would say those MCO $2.50 strike 2011 Puts look damn attractive right about now. Since we are not, we will leave the trade to some other, soon to be much richer, gambler, better known as investor.