DOJ Scrambles To Appear Impartial, Says "Don't Think Moody's Is Off The Hook"
While Moody's slipped over 20% when the DoJ announced its cajillion dollar lawsuit against S&P for knowing the crisis was coming but not telling anyone, it later bounced back over 10% as investors believed the non-US-downgrading rating agency (that happened to be owned by Buffett) was too-big-to-jail. After-hours today, Reuters is reporting that the Justice Department and multiple states are discussing also suing Moody's Corp for defrauding investors, according to people familiar with the matter, but any such move will likely wait until a similar lawsuit against rival Standard and Poor's is tested in the courts. The stock is trading down 3% after-hours as sources (not authorized to speak publicly) added "don't think Moody's is off the hook." We can't help but think about the pending sequester-delaying deficit spike as perhaps, to appear impartial, the DoJ will keep the threat of a lawsuit against Moody's alive... during the entire period when the US may and should be downgraded.
* Federal, state actions contemplated against Moody's
* Connecticut case against Moody's proceeding to trial
* Lawyers say stronger paper trail exists against S&P
By Aruna Viswanatha and Luciana Lopez
Feb 7 (Reuters) - The U.S. Justice Department and multiple states are discussing also suing Moody's Corp for defrauding investors, according to people familiar with the matter, but any such move will likely wait until a similar lawsuit against rival Standard and Poor's is tested in the courts.
Inquiries into Moody's are in the early stages, largely because state and federal authorities have dedicated more resources to the S&P lawsuit, said the sources, who were not authorized to speak publicly about enforcement discussions.
Moody's in the past has defended itself against similar allegations, including a 2011 congressional report that concluded the major ratings agencies manipulated ratings to drive business.
"Don't think Moody's is off the hook," said one law enforcement official.
Another rival, Fimalac SA's Fitch Ratings, is unlikely to face similar action, the sources said, since it is a much smaller player in the U.S. ratings industry. The firm also escaped the brunt of scrutiny from congressional investigators.
A similar coordinated federal-state action against Moody's would follow lawsuits two states have already filed against the ratings firm. Connecticut, which led the states in this week's actions, sued Moody's and S&P in March 2010.
In January a state court in Hartford denied the last of the preliminary motions Moody's had filed to have the case thrown out. That case and the one against S&P are proceeding to trial in the second half of 2014.
Those earlier cases and the more recent ones against S&P are based on a theory that the firms misled investors by stating that their ratings on mortgage products were objective and not influenced by conflicts of interest.
Instead, the lawsuits contend, the firms inflated ratings and understated risks as the housing bubble started to burst, driven by a desire to gain more business from the investment banks that issued mortgage securities.
Framing the cases in that manner steers clear of attacking individual ratings, which have largely been shielded under free speech protections. Instead, the focus is on proving false just one statement S&P made - that its ratings were objective.
"It may very well be that the government's testing their waters and they don't want to bite off more than they can chew," said Philip Hilder of Hilder & Associates in Houston, a former federal prosecutor. "Nobody should take these cases lightly."
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