The Securities and Exchange Commission is suing a credit-rating agency that promoted itself as free of the conflicts of interest that led larger, more well-known raters to drag their feet on downgrading mortgage-backed securities before the peak of the credit crisis.
On Tuesday the SEC charged Egan-Jones Ratings Co. and Sean Egan, its owner and president, with making material misrepresentations and omissions in the firm’s 2008 application to become a nationally recognized statistical rating organization (NRSRO) in order to review asset-backed securities (ABS) and government securities. Among the accusations is that Egan-Jones let two of its analysts help determine credit ratings for issuers whose securities they owned. The firm “failed to enforce its policies to address conflicts of interest arising from employee ownership of securities,” the SEC complaint says.
Egan previously told CFO that his firm’s ratings have more integrity than those of larger raters because the firm does not charge companies for them, and thus “doesn’t have to worry about alienating issuers.” Egan did not immediately return an e-mail CFO sent to him this afternoon.
Egan-Jones fought for the NRSRO designation, which in 2005 was limited to just five firms: Moody’s Investor Service, Standard & Poor’s Rating Service, Fitch Inc., A.M. Best, and Dominion Bond Rating Service. The Credit Rating Agency Reform Act of 2006 prompted the SEC to rewrite its rules and add Egan-Jones to the group in December 2007. At that time, Egan-Jones was an NRSRO of financial institutions, insurance companies, and corporate issuers. The firm was later approved, under an application made in 2008, as an NRSRO for asset-backed and government securities. But that application contained falsehoods, the SEC now alleges.
The complaint alleges Egan-Jones “falsely stated” it had been continually issuing credit ratings in the ABS and government categories since 1995 and had made a total of 150 ABS-issuer ratings and 50 government-issuer ratings. The SEC says that claim was not true, or at least the firm had not made such ratings publicly available, which is a requirement for the NRSRO designation. Moreover, the SEC alleges that Egan claimed in applications and annual certifications that it was providing information that was “accurate in all significant respects when he knew that it was not.”
The SEC currently considers 10 rating agencies as NRSROs, including Egan-Jones. The designation implies the government has blessed a rating agency as a credible provider.