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Moody's Settles With States for $863.7M Over Misleading Ratings

Credit rating agency Moody's has reached a settlement with attorneys general in 20 states, including Connecticut, and the U.S. Department of Justice over allegations it misled investors when it issued positive ratings for shaky mortgage-backed securities in the lead up to the 2008 financial crisis.

By David Owens

Credit rating agency Moody's has reached a settlement with attorneys general in 20 states, including Connecticut, and the U.S. Department of Justice over allegations it misled investors when it issued positive ratings for shaky mortgage-backed securities in the lead up to the 2008 financial crisis.

Connecticut, which was the first state to sue Moody's, will receive $31.5 million as part of an $863.7 million settlement, Connecticut Attorney General George Jepsen said Friday night. Connecticut's share of the settlement will go to the general fund.

The settlement is similar to one reached in 2015 against Standard & Poor's, which agreed to pay $1.375 billion to settle similar allegations. Connecticut received $36 million in that settlement, in which the state was a lead plaintiff. Both cases hinged on a legal theory developed by the Connecticut attorney general's office, using state laws that bar deceptive sales as an unfair trade practice.

In the Moody's case, the plaintiffs accused Moody's Corp., Moody's Investor Services Inc. and Moody's Analytics Inc. of allowing its ratings to be influenced by the company's financial interests, including fees from the banks it worked for. That led to inflated ratings for investments broadly known as structured finance securities, including some backed by mortgages. The securities, many of which turned out to be toxic, were packaged and sold by the banks. Some of the banks reached separate settlements with authorities.

"Moody's considered its own business interests, contrary to its public statements that its ratings were objective, and the results to our state and national economy were dramatic and devastating," Jepsen said in a statement.

Subprime mortgages packed into securities that the banks sold were at the center of the 2008 financial meltdown. Jepsen said Moody's misconduct began as early as 2001 and became especially bad between 2004 and 2007.

As part of the settlement, Moody's has agreed to a set of reforms to address conflicts of interest and to protect the integrity and transparency of rating methods to prevent similar problems. The company also "agreed to a statement of facts acknowledging conduct related to its analysis of structured finance securities."

(c)2017 The Hartford Courant (Hartford, Conn.)

Caroline Cournoyer is GOVERNING's senior web editor.
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