The Moody’s scandal takes its toll

By Felix Salmon
May 10, 2010
disclosed late on Friday that it received a Wells Notice on March 18. Mish says that the receipt of the notice "is a significant event that Moody's failed to report to shareholders", but Reuters is talking about "relatively short six-week lag in disclosing that it got a Wells Notice".

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Can the SEC just release, daily, the names of all the companies to whom it has sent Wells notices? Moody’s stock has plunged today after it disclosed late on Friday that it received a Wells Notice on March 18. Mish says that the receipt of the notice “is a significant event that Moody’s failed to report to shareholders”, but Reuters is talking about “relatively short six-week lag in disclosing that it got a Wells Notice”.

I don’t understand what purpose is served by letting companies make their own decisions as to whether or not receipt of a Wells notice is a material event. But this one certainly does, since it raises the possibility that Moody’s will cease to be officially recognized as a ratings agency:

On March 18, 2010, MIS received a “Wells Notice” from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS in connection with MIS’s initial June 2007 application on SEC Form NRSRO to register as a nationally recognized statistical rating organization…

The Staff has informed Moody’s that the recommendation it is considering is based on the theory that MIS’s description of its procedures and principles were rendered false and misleading as of the time the application was filed with the SEC in light of the Company’s finding that a rating committee policy had been violated.

The finding in question relates to the scandal uncovered by the FT two years ago; the wheels of the SEC grind slowly, but once it reaches the point of issuing a Wells notice, it’s pretty clear that it’s taking things very seriously. What’s more, it’s clear that even a large market reaction to news is often insufficient, and that it’s never too late to sell. On May 20 2008, Moody’s stock closed at $42.69; after the FT broke its story on the 21st, it plunged to $35.89. Today, it’s at $21.88. And if it turns out to be at serious risk of losing its NRSRO status, it will surely fall further still.

Update: Henry Blodget reports that Moody’s CEO Raymond McDaniel dumped 100,000 shares of stock at $29 a share the day the Wells Notice arrived. Looks bad: as Blodget says, even if it was an automatic sale, shouldn’t he have canceled it once he received material non-public information?

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