SEC charges credit rater with false claims

By Peter Schroeder - 04/24/12 04:01 PM ET

The Securities and Exchange Commission (SEC) has filed charges against a credit rating agency, just weeks after the agency downgraded the nation's credit rating for the second time in nine months.

The SEC said Tuesday that Egan-Jones made "material misrepresentations" of its work and expertise when it applied to be deemed a "nationally recognized statistical rating organization," or NRSO, in 2008.

In particular, the SEC said the firm falsely stated it had rated 150 asset-backed issuers and 50 issuers of government bonds since 1995 in its application. Rather, the SEC claimed Egan-Jones had not issued any ratings when it submitted its application, and also failed to enforce policies guarding against conflicts of interests for employees and on other ethical matters.

The SEC also filed charges against the rater's owner and president, Sean Egan, for signing off on applications and certifications that contained inaccurate information.

In a feisty response, Egan-Jones called the SEC's action "inexplicable," arguing it was simply an effort to keep the upstart rating agency down and protect the "corrupted business model which almost single-handedly destroyed the US economy."

Currently, the rating agency industry is dominated by three major firms — Fitch Ratings, Moody's Investors Service and Standard & Poor's — that receive payment from issuers in exchange for their ratings.

"Egan-Jones believes that the SEC's action is inexplicable except as an effort to silence Egan-Jones and maintain the status quo of a conflicted, issuer-paid ratings agency monopoly," the firm said in a statement.

The rater touted its status as an independent rating agency, as opposed to the major raters that provide ratings in exchange for payment from issuers. It also trained its fire on the three top raters, arguing that they should be the ones facing federal scrutiny for their role in the financial crisis.

"The damage done by the large issuer-paid firms, which have a monopoly on the industry, is incalculable," it said. "Congress has found that the large issuer-paid firms were instrumental in creating the inflated and erroneous AAA ratings, for billions in profits. ... The SEC has not suggested that it will ever take any action against these firms for their role in issuing conflicted, erroneous ratings which, as Congress found, contributed significantly to America's economic crises."

Egan-Jones garnered headlines in July, when it was the first rating agency to downgrade the nation's once sterling credit rating. Standard & Poor's followed suit in August, while Fitch and Moody's have held pat at the top AAA rating.

Citing the nation's persistent debt woes, Egan-Joes issued a second downgrade on the nation's debt rating on April 5, lowering it to AA and giving it the lowest grade of any rater, big or small.