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Settlement Over Pre-Crisis Ratings Made by Moody’s with U.S., States for $864 Million

Settlement Over Pre-Crisis Ratings Made by Moody’s with U.S., States for $864 Million
The U.S. Department of Justice announced that in relation to its ratings of risky mortgage securities in the run-up to the 2008 financial crisis and which was partly responsible for the financial crisis and looses of millions to investors and banks, Moody's Corp has agreed to pay nearly $864 million to settle with U.S. federal and state authorities.
Allegations that the firm contributed significantly to the worst financial crisis since the Great Depression, the department said in a statement that the credit rating agency reached the deal with the Justice Department, 21 states and the District of Columbia.
"Moody's failed to adhere to its own credit-rating standards and fell short on its pledge of transparency in the run-up to the Great Recession," Principal Deputy Associate Attorney General Bill Baer said in the statement.
By paying out a settlement fee of $1.375 billion in 2015, the S&P Global's Standard & Poor's had also entered into a similar accord with the government agencies.
While an amount of $426.3 million, to be paid by Moody’s, would be split among the states and Washington, D.C., the ratings agency said that it would pay a $437.5 million penalty to the Justice Department.
With various measures including keeping analytic employees out of commercial-related discussions, Moody's has also agreed to measures designed to ensure the integrity of credit ratings going forward as a part of its settlement with the Justice Department.
For at least the next five years, certification of compliance with the measures has to be given by the rating agency's chief executive.
Moody's noted that the settlement contains no finding of a violation of law or admission of liability and said that it stands behind the integrity of its ratings.
It has already has implemented some of the compliance measures in the agreement, Moody's said.
Moody's shares closed at $96.96 on Friday. On Oct. 21, the day Moody’s disclosed the Justice Department had notified the firm it was planning to sue over the ratings, its stock plummeted more than 5 percent.
The Justice Department probe was resolved without a federal lawsuit by Moody's settlement on Friday. Resolution was reached after the U.S. filed a $5 billion fraud suit in the Standard & Poor's case.
In 2010, a lawsuit was filed against Moody’s by the state of Connecticut, whose attorney general helped lead negotiations. While there were many other states with potential claims, Mississippi and South Carolina had later sued the firm.
Despite claims of independence and objectivity, Moody's ratings were influenced by its desire for fees, the Connecticut's lawsuit claimed. Accusations of knowingly inflating ratings on toxic mortgage securities were also made against the agency by it.
Connecticut Attorney General George Jepsen said in a statement on Friday that Moody's ratings were "directly influenced by the demands of the powerful investment banking clients who issued the securities and paid Moody's to rate them."

Christopher J. Mitchell

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