Well, well. Ratings agency Moody's
Falling down the Well(s)
A Wells notice is a precursor to a civil lawsuit in an SEC investigation. It outlines for the person or company getting the letter what charges the regulatory agency might file and gives them a chance to mount a defense.
Companies typically give investors a heads-up when they're under investigation. Last October, brokerage house Schwab
The company you keep
Of course, if you're posturing as an outlaw biker, as Moody's apparently is, you can't go wrong siding with one of the most vilified investment banks out there. Goldman Sachs
While there is no requirement that a company disclose receipt of a Wells notice, a company needs to consider whether the action is material to its business. In the Schwab case, for example, it only dealt with two of its mutual funds and was unlikely to threaten the entire company's existence, but it still disclosed the notice right away.
In Moody's case, the SEC alleges that the company's application to become a nationally recognized statistical rating organization contained "false and misleading" information. The government agency alleges that members of a committee overseeing a type of European derivatives investment failed to modify inflated ratings that were due to software issues. If the SEC is successful in this case, Moody's rating business would be busted.
Some might consider that to be material information, particularly the investors who put money into the company in the weeks between when Moody's got the notice in March and when it finally got around to publicizing it in May.
Heading for the exits
Worse for Moody's image, its CEO decided to set up a trading plan to unload his stock just a month before the company received the Wells notice. It apparently wants us to believe CEO Raymond McDaniel was operating in a vacuum and was unaware the SEC was investigating the firm. It sure doesn't look good that he unloaded some $4.3 million worth of stock the same day Moody's was served.
Although Berkshire Hathaway
Whether or not the SEC carries through on its threat, Moody's had an obligation to inform investors it was under investigation. At best, it will be distracted by having to defend its actions. At worst, it could end up getting shanked by regulators.
Jailhouse scars are appropriate on outlaws and thugs, not on the companies we invest in.
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