Opinion

Felix Salmon

The Moody’s scandal takes its toll

By Felix Salmon
May 10, 2010

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?

Comments
6 comments so far | RSS Comments RSS

“Can the SEC just release, daily, the names of all the companies to whom it has sent Wells notices? … 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.”

The whole point of the Wells process, as envisioned in the Wells Commission report of 1972, is that there would be a nonpublic procedure for sorting out meritorious enforcement actions from non-meritorious ones before charges are actually filed, analogous to the grand jury indictment process in criminal law. To use a ridiculous example, if the SEC is preparing to charge Ford Motor Company when the charges actually pertain to Ford’s House Of Chicken & Waffles, then FMC should have an opportunity to point that out to the SEC before taking a hit in the public record.

Posted by alkali | Report as abusive
 

Is Blodget really suggesting that it’s a good idea to introduce discretion into 10b5-1 trading plans? The whole point of these plans is to demonstrate, via commitment in advance, that trades are executed without the benefit of inside information.

Does Blodget not realize how dumb it is to advocate discretionary cancellation of 10b5-1 trades?

Posted by Beer_numbers | Report as abusive
 

The way the Wells Notice is supposed to work is a bit like the way the stock market is supposed to: well, unless gamed.

It’s prudent to allow companies having been served with Wells notices a margin of time during which to make necessary announcements and so forth on their own. That’s a legal courtesy, and so far so good.

But after say, 15 or 30 days of scofflaw recipient inaction in the diligence department, the SEC would be well within rights to initiate announcement and issue penalties accordingly. One of the intangible penalties would be such an SEC public announcement itself, which wouldn’t look good at all.

Posted by HBC | Report as abusive
 

Beer_numbers:
1) Ironic is how to characterize your comment. The SEC already does allow an individual to cancel their planned trades because — “Section 10(b) and Rule 10b-5 apply ‘in connection with the purchase or sale of any security.’ Thus, a purchase or sale of a security must be present for liability to attach.” — http://www.sec.gov/interps/telephone/pho nesupplement4.htm
2) The executive by executing the trade as planned still was advantaged by his position. He could have rushed the announcement of the Wells receipt out the door, instead he sat on it until AFTER he had completed his sale. An alternate form of inaction that was to his benefit.

More than anything I think Felix is pointing out that giving these institutions discretion in when to release the notice, results in corruption (or at least the perception of it). The SEC should just mandate a response period and an announcement date. They must respond at 5pm on the 3rd Monday after receipt, not before, not after, no leeway.

Posted by davidwe | Report as abusive
 

Trading plans are implemented to ALLOW what would have been ILLEGAL trading, okay. Who could comment that such practice should be allowed without mandating a mandatory NO SELL when holding material negative information. I bet they love these “plans” at these times, don’t they. That’s why they can’t have it both ways. Fraud has entered our plans, just like everything else, “getting around it” is baked in the cake. People are losing faith in our markets and this is another straw to that end.

Wells notices should me a mandated disclosure within 48 hours. Period. 8-K material disclosure is within the week, is it not? Materiality determinations can no longer be left up to these people. They’re no longer trustworthy. Disclosure is about the OWNERS learning about what they own, not for the managers and their bonuses. It’s about the rights of ownership.

The comments to this board are unusual. Hasn’t there been enough fraud in this country to merit some harsh changes to our markets? To some, not. To most, absolutely. Bottom line, we can no longer let the same people on the inside set the rules of the market. They have breached trust.

Posted by CommonSense111 | Report as abusive
 

Davidwe,

1) It is not illegal per se to cancel a trade under a plan. However, it defeats the purpose of the plan by making all previous transactions under the plan suspect. The cancelled transaction is potential evidence of insider trading, and previous transactions under the plan are no longer automatically entitled to the safe harbor. (See section (b) in the part you quoted from).

Posted by AnonymousChef | Report as abusive
 

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