April 19, 2012 9:35 pm

SEC considers case against Egan-Jones

Egan-Jones and the credit rating agency’s founder are expected to be charged by US securities regulators for allegedly filing misleading information in its 2008 application to rate asset-backed securities and sovereign debt, according to people familiar with the matter.

The Securities and Exchange Commission has decided to file a civil action against Sean Egan and his firm for allegedly providing misleading information about the number of ratings it issued and the length of time it had rated those securities, a lawyer for Mr Egan said.

The SEC notified Mr Egan about the possible charges through a Wells notice several months ago. People familiar with the case said the SEC is seeking to ban Mr Egan and the firm from rating asset-backed securities and sovereign debt for two years. Mr Egan runs one of the only credit rating agencies where investors, not borrowers, pay for ratings. He has been an outspoken critic of rating groups Moody’s and Standard & Poor’s , saying they face too much of a conflict of interest because groups seeking ratings also pay for them.

Egan-Jones received SEC approval to rate financial institutions and corporations in late 2007. The next year, Egan-Jones was approved to rate asset-backed securities, municipal and foreign government debt.

Mr Egan made headlines late last year when he downgraded Jefferies over its exposure to European sovereign debt immediately after MF Global filed for bankruptcy protection, due in part to investor concerns about its exposure. He faced criticism over the downgrade but vigorously defended it.

Mr Egan said on CNBC that the application was “accurate to the best of my ability”.

Jacob Frenkel, a lawyer for Mr Egan, said he was “disheartened” that the SEC was moving forward with the case. He suggested the SEC was trying to silence Mr Egan, who he said would “vigorously” defend the charges. In a response filed with the SEC, Mr Egan’s lawyers called the allegations “an extraordinary, if not outrageous example of not only proposed agency action to effect disparate treatment of Egan-Jones but [also] a proposal for the commission to frustrate and chill the congressional mandate of public interest, the encouragement of competition and the issuance of ratings with independence, quality and integrity”.

If brought, the possible charges would be the first against a rating firm since the SEC received additional oversight responsibilities. In 2010, the SEC issued a report criticising Moody’s for its application to rate securities but stopped short of bringing a case against the firm. The SEC warned S&P in September that it might face civil charges in connection with a 2007 mortgage-related security but no charges have been brought to date. S&P said it was co-operating.

In disputing the allegations, Egan-Jones said in its application that it began rating both classes of securities in 1995 and had 150 ratings outstanding for asset-backed securities and 50 for sovereign debt.

Egan-Jones subsequently revised its application twice, Mr Egan’s lawyers said, based on a more conservative approach to reflect 14 asset-back ratings and 13 sovereigns and revised its start date to 2005 from 1995. Mr Egan said the SEC “has not issued any guidance whatsoever to define” credit rating or how to count them.

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