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District Court, in Case Against Moody’s, Leaves the Door Open for Claims Against Rating Agencies Under the False Claims Act

In United States ex rel. Kolchinsky v. Moody’s Corporation, Case No. 1:12-cv-01399 (S.D.N.Y. 2012), a former employee of Moody’s credit rating agency alleged that the agency engaged in rampant fraud leading up to the financial crisis. On February 4, 2016, the U.S. District Court for the Southern District of New York, in its opinion on Moody’s motion to dismiss, rejected several theories of liability against Moody’s but left open the possibility of liability under the False Claims Act for Moody’s use of an electronic “Ratings Delivery Service.”

Ilya Eric Kolchinsky was Moody’s Managing Director.  His first amended complaint alleges that he repeatedly attempted to raise concerns to his superiors about Moody’s false credit ratings. Moody’s ignored Kolchinsky’s concerns and ultimately terminated him. In 2009 and 2010, Kolchinsky testified at three separate congressional hearings regarding the concerns he raised while at Moody’s.

In his opinion, Judge William Pauley III explained that to successfully plead a False Claims Act cause of action, the Relator must show that the defendant either directly submitted, or caused to be submitted, false claims to the government for payment, or that the government relied on the defendant’s false claims in making payment. Because Moody’s charges the government for subscriptions to its rating service, using the service knowingly to issue false ratings could result in a false claim for payment to the government. Judge Pauley noted that the complaint was insufficiently specific on the Ratings Delivery Service count, and granted the Relator (Kolchinsky) leave to file a narrower second amended complaint focusing on this basis for liability under the False Claims Act. Specifically, the Judge found that Kolchinsky’s allegations failed to identify a single example of any government agency that paid for the Ratings Delivery Service.

Since the Ratings Delivery Service claims in the first amended complaint related to periods after May 27, 2009, the Judge did not preclude these claims in their entirety and allowed Kolchinsky to re-plead these specific claims in a second amended complaint.

Ratings agencies were instrumental in the culture that led to the 2008 financial crisis. Imposing False Claims Act liability on these agencies could have widespread ramifications for the accuracy of ratings issued by agencies in the future.

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