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Moody's

Feds to sue Moody's over mortgage securities ratings

Kevin McCoy, USA TODAY

The Department of Justice plans to sue Moody's over valuations the company assigned to mortgage-backed securities in the run-up to the nation's financial crisis in 2008, the financial ratings giant said Friday.

Financial ratings giant Moody's in New York

Investors sent Moody's (MCO) shares down more than 5.4% or $5.85 to a $102.24 close.

Prosecutors wrote in a letter Sept. 29  that the civil complaint would be filed in New Jersey federal court against Moody's and its Moody's Investors Service unit, the company disclosed in a litigation update included with its higher-than-forecast earnings results for the third quarter.

 The complaint will allege federal violations related to ratings the company "assigned to residential mortgage-backed securities and collateralized debt obligations," the company's disclosure said.

"The DOJ also stated that its investigation remains ongoing and may expand to include additional theories," Moody's said.

Separate from the expected federal action, Moody's said, "A number of states attorneys general have indicated they also expect to pursue similar claims under state law." Those claims could include additional time periods, legal theories or activities, the company said.

2008 crisis still hangs over credit-rating firms

Financial credit rating companies are paid by corporations and lenders to assign valuations to the financial securities they issue. Investors, government officials and others have accused the industry of contributing to the financial crisis and ensuing real estate market crash by assigning unreasonably high ratings to mortgage-backed securities.

The ratings companies have  drawn criticism over purported failures to provide adequate warnings about the risks of investing in those securities.

S&P paying $1.4B over crisis-era ratings

Moody's is the world's second-largest financial ratings company after Standard & Poor's, which was hit with similar civil DOJ allegations in 2013. Standard & Poor's  reached a nearly $1.4 billion settlement  with the DOJ, 19 states and the District of Columbia in 2015. The settlement covered ratings for residential mortgage-backed securities and collateralized debt obligations issued by S&P from 2004-2007

Half of the S&P payment, or $687.5 million, represented the largest financial penalty ever paid to the federal government by a financial ratings agency, the DOJ said.

Along with disclosing the planned federal lawsuit, Moody's reported a 10% increase in third-quarter revenue. The company raised its full year earnings per share guidance to $4.76 to $4.86, up from late September's forecast of $4.70 to $4.80.

 Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc

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