California Attorney General's Office Announces $150 Million Settlement with Financial Services Company Moody's For Inflating Mortgage-Backed Securities Ratings

LOS ANGELES – Acting Attorney General Kathleen A. Kenealy, along with the U.S. Department of Justice and the attorneys general of 20 other states and the District of Columbia, today announced an $863.8 million settlement with Moody's Corporation (Moody's), a business and financial services company, to resolve federal and state civil claims related to the company’s misconduct in inflating ratings of residential mortgage-backed securities.

An investigation conducted by the Attorney General's Office showed that Moody's Corporation systematically misrepresented to the public, and to the California Public Employees' Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), that its ratings of structured finance securities were based on an objective and reliable analysis and not influenced by Moody's economic interests.  Moody’s clients relied on these ratings to invest in the structured finance securities, the collapse of which led to the 2008 financial crisis.  

“Moody’s Corporation misled their clients about the objectivity of its ratings and their misconduct caused significant losses to Californian’s pension funds,” Acting Attorney General Kathleen Kenealy said. “I want to thank our California Department of Justice attorneys for their great work to hold Moody’s accountable.”

Moody's will pay a total of $863,791,823 to federal and state government entities. The Office of the Attorney General will recover $150 million in damages for the State of California, and the settlement recovers losses sustained by CalPERS and the CalSTRS on their investments. The remainder of the total settlement proceeds will be distributed among the U.S. Department of Justice and the other 21 state attorneys general.   

As part of the settlement, Moody's agreed to a statement of facts which indicate that, despite its claims of independence and objectivity, the desire for market share resulted in it using more lenient rating criteria than it publicly claimed to be using, resulting in ratings which were higher than they would have been if Moody's had used its publicly stated criteria. 

The settlement with Moody's arises from the investigation into mortgage-backed securities by Attorney General's Mortgage Fraud Strike Force, which was formed in May 2011 to comprehensively investigate misconduct in the mortgage industry.  The Attorney General's additional efforts to investigate the mortgage crisis include securing approximately $20 billion for California in the National Mortgage Settlement and sponsoring the California Homeowner Bill of Rights, a package of laws instituting permanent mortgage-related reforms.

For more information on the U.S. Department of Justice settlement, visit: http://www.justice.gov/

This settlement is the latest in several resolutions holding responsible the institutions that contributed to the financial crisis. 

To date, the Attorney General's Office has recovered over $1 billion for California’s public pension funds.  In August 2014, the Attorney General obtained a $300 million settlement with Bank of America over its misrepresentations in residential mortgage-backed securities sold to CalPERS and CalSTRS.  Similar settlements were reached in July 2014 with Citigroup Inc. for nearly $200 million and in November 2013 with J.P. Morgan Chase & Co. for $300 million.

In February 2015 the Attorney General's Office announced a $210 million settlement with rating agency Standard & Poor's and its parent, McGraw-Hill Financial Inc.