January 13, 2017

Connecticut, first state to sue Moody's in 2010, will receive $31.5M

Attorney General George Jepsen announced today that Connecticut, the U.S. Department of Justice, 20 other states and the District of Columbia have reached a settlement agreement with Moody's Corporation, Moody's Investor Services, Inc. and Moody's Analytics, Inc. resolving allegations that the credit rating agency mislead investors when it rated structured finance securities in the lead-up to the 2008 financial crisis.

The settlement culminates a seven-year effort led by Connecticut to hold Moody's responsible for its role in the 2008 financial crisis.

The settlement requires Moody's to pay $863,791,823 million to the states and the Department of Justice.  The settlement amount will be split among the states and the Department of Justice. Connecticut was the first state to sue Moody's in 2010 and will receive $31,519,461 million in the settlement, which will go to the state's general fund.

"We alleged that Moody's ratings of structured finance securities, including mortgage-backed securities, were directly influenced by the demands of the powerful investment banking clients who issued the securities and paid Moody's  to rate them," said Attorney General Jepsen. "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. I am especially proud that it was the Connecticut Office of the Attorney General that developed the unique legal theory that proved foundational in both this case and the similar case against Standard & Poor's that we settled last year. We would not have been able to achieve such a significant result if not for the strong partnership among the Department of Justice and our fellow states, and I'm grateful for their efforts on this case."

In its 2010 lawsuit, the state alleged that, despite Moody's repeated statements emphasizing its independence and objectivity, the credit rating agency allowed its analysis to be influenced by its desire to earn lucrative fees from its investment bank clients. The state further alleged that the agency knowingly assigned inflated credit ratings to toxic assets packaged and sold by the Wall Street investment banks. The alleged misconduct began as early as 2001 and became particularly acute between 2004 and 2007.

Structured finance securities backed by subprime mortgages were at the center of the 2008 financial crisis. These financial products, including residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), derive their value from the monthly payments consumers make on their mortgages.

In addition to the financial settlement, Moody's has agreed to a statement of facts acknowledging conduct related to its analysis of structured finance securities. Connecticut and other states retain authority to enforce their laws if Moody's engages in similar conduct in the future.

Finally, Moody's agreed to a set of reforms designed to address conflicts of interest and procedures to protect the integrity and transparency of rating methodologies to prevent the problems leading to the 2008 financial crisis from reoccurring. The United States Securities and Exchange Commission adopted similar requirements in 2014.

Attorney General Jepsen thanked Connecticut's federal and state partners for the cooperation and coordination that led to today's settlement announcement.

In addition to Connecticut, the states involved in today's settlement include Arizona, California, Delaware, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Massachusetts, Maryland, Mississippi, Missouri, New Hampshire, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina and Washington as well as the District of Columbia.

Attorney General Jepsen particularly thanked Mississippi Attorney General Jim Hood for his partnership throughout this case and for joining Connecticut early its effort to hold the credit rating agencies accountable. Mississippi and Connecticut were the first states to sue Standard and Poor's in a similar effort that resulted in a $1.375 billion state-federal settlement in February 2015.

Assistant Attorneys General Matthew Budzik, head of the Finance Department; Jeremy Pearlman; Lorrie Adeyemi, head of the Consumer Protection Department; Patrick Ring; Dinah J. Bee; and Michael Cole, chief of the Antitrust and Government Program Fraud Department; Paralegal Holly MacDonald; and former Assistant Attorney General George O'Connell assisted the Attorney General with this matter.

Please click here to view the settlement documents and Statement of Facts.

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