Just breaking now…The SEC is charging ratings agency Egan-Jones for making “material misrepresentations” to the SEC in the summer of 2008 when it applied to be an official Nationally recognised Statistically Ratings Agency.
This is going to be incredibly controversial.
Egan-Jones has attempted to be an alternative to the Moody’s/Fitch/Oligopoly, and it’s delivered some harsh ratings, including downgrading the US, various European countries, as well as Jefferies last autumn.
Among the claims by the SEC: Egan Jones misrepresented how much work it had done on government ratings, and that the company misrepresented its knowledge of clients’ positions in the entities it rated.
3. EJR violated Exchange Act Section 15E(a)(1) and Rule 17g-1(b) thereunder when it made willful and material misrepresentations and omissions in its July 2008 application to the Commission to register as an NRSRO for issuers of ABS and government securities. In EJR’s July 2008 application to register in these two additional classes, EJR falsely stated that, as of the date of its application, it had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings. EJR further falsely stated in its application that it had been issuing credit ratings in these categories as a credit rating agency on a continuous basis since 1995. In fact, at the time of its July 2008 application, EJR had not issued – that is, made available on the Internet or through another readily accessible means – any ABS or government issuer ratings. EJR wilfully made these misstatements and omissions to conceal the fact that it had no experience issuing ratings on ABS or government issuers, and therefore did not meet the requirements for registration of an NRSRO with respect to these categories. Egan signed the application on EJR’s behalf, certifying that it was “accurate in all significant respects,” even though he knew that it contained these material misrepresentations and omissions.
4. EJR violated Exchange Act Section 15E(b)(2) and Rule 17g-1(f) when it made willful and material misrepresentations or omissions regarding the number of EJR’s outstanding ABS and government issuer ratings, and the length of time that it had been issuing credit ratings in these categories on a continuous basis, in subsequent annual certifications submitted to the Commission. EJR wilfully made these misstatements and omissions in order to maintain its registration as an NRSRO in these classes.
5. In addition, EJR falsely stated in submissions to the Commission that it was unaware whether its subscribers held long or short positions in particular securities. In fact, EJR’s salespeople were aware of certain clients’ holdings, and in some instances knew whether clients had long or short positions. In at least three instances, information about whether a client had a long or short position was conveyed to Egan, EJR’s primary analyst.
Washington, D.C., April 24, 2012 — The Securities and Exchange Commission today announced charges against Egan-Jones Ratings Company (EJR) and its owner and president Sean Egan for material misrepresentations and omissions in the company’s July 2008 application to register as a Nationally recognised Statistical Rating organisation (NRSRO) for issuers of asset-backed securities (ABS) and government securities. EJR and Egan also are charged with material misrepresentations in other submissions furnished to the SEC and violations of record-keeping and conflict-of-interest provisions governing NRSROs.
- SEC Order
The Commission issued an order instituting proceedings in which the SEC’s Division of Enforcement alleges that EJR — a credit rating agency based in Haverford, Pa. — submitted an application to register as an NRSRO for issuers of asset-backed and government securities in July 2008. EJR had previously registered with the SEC in 2007 as an NRSRO for financial institutions, insurance companies, and corporate issuers.
The SEC’s Division of Enforcement alleges that in its 2008 application, EJR falsely stated that as of the date of the application it had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings. EJR further falsely stated in its 2008 application that it had been issuing credit ratings in the ABS and government categories as a credit rating agency on a continuous basis since 1995. In fact, at the time of its July 2008 application, EJR had not issued — that is, made available on the Internet or through another readily accessible means — any ABS or government issuer ratings, and therefore did not meet the requirements for registration as an NRSRO in these categories. EJR continued to make material misrepresentations regarding its experience rating asset-backed and government securities in subsequent annual certifications furnished to the SEC.
The SEC’s Division of Enforcement also alleges that EJR made other misstatements and omissions in submissions to the SEC by providing inaccurate certifications from clients, failing to disclose that two employees had signed a code of ethics different than the one EJR disclosed, and inaccurately stating that EJR did not know if subscribers were long or short a particular security.
The SEC’s Division of Enforcement further alleges that EJR violated other provisions of Commission rules governing NRSROs. EJR failed to enforce its policies to address conflicts of interest arising from employee ownership of securities, and allowed two analysts to participate in determining credit ratings for issuers whose securities they owned. EJR also failed to make and retain certain required records, including a detailed record of its procedures and methodologies to determine credit ratings and e-mails regarding its determination of credit ratings.
The SEC’s Division of Enforcement alleges that Egan provided inaccurate information that was included in EJR’s applications and annual certifications. He signed the submissions and certified that the information provided in them was “accurate in all significant respects,” when he knew that it was not. Egan also failed to ensure EJR’s compliance with the recordkeeping requirements and conflict-of-interest provisions.
The SEC’s Division of Enforcement alleges that, by the conduct described above, EJR wilfully violated Exchange Act Sections 15E(a)(1), 15E(b)(2), 15E(h)(1) and 17(a), and Rules 17g-1(a), 17g-1(b), 17g-1(f), 17g-1(a)(2), 17g-2(a)(6), 17g-2(b)(2), 17g-2(b)(7), and 17g-5(c)(2). The Division of Enforcement further alleges that by the conduct described above, Egan wilfully made, or caused EJR to make, material misstatements in its Form NRSRO, and caused or wilfully aided, abetted, counseled, commanded, induced or procured EJR’s violations of Sections 15E and 17(a) of the Exchange Act and Rules 17g-1, 17g-2, and 17g-5.
The SEC’s investigation was conducted by Stacy Bogert, Pamela Nolan, Alec Koch, and Yuri Zelinsky. The SEC’s litigation will be led by James Kidney.
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