Bloomberg News

Egan-Jones Sues to Have SEC Allegations Tried in Federal Court

June 07, 2012

Egan-Jones Ratings Co. and its founder Sean Egan sued the U.S. Securities and Exchange Commission to force the agency to bring its allegations of misrepresentation against the firm before a federal judge.

Egan-Jones said in a complaint filed yesterday in federal court in Washington that it would be deprived of its rights, including that to a jury trial, if the SEC’s enforcement action was to proceed in an “administrative forum” rather than in court where the company can present evidence of the SEC’s “improper” motive for making the allegations.

The firm, which calls itself an alternative to the larger providers of credit ratings because it gets paid by subscribers rather than by issuers of debt, said in its complaint that the SEC conducted a biased investigation that resulted in the administrative proceeding in April.

“The administrative proceeding is the latest in a series of SEC actions which are designed to diminish and marginalize Egan-Jones while supporting and maintaining the status quo of an issuer-paid ratings agency monopoly,” the firm said in the complaint.

“While the SEC targets Egan-Jones for alleged infractions which have not affected a single rating or investor, the SEC has not suggested that it will ever take any real, proportional action against the large issuer-paid firms for issuing profitable inflated ABS and CDO ratings which brought about America’s economic crises.”

Exam Staff

The SEC violated Egan-Jones’s rights and abused the investigative process by moving exam staff into and out of the enforcement investigation, according to the complaint. Egan also said the agency deliberately leaked to the press that the SEC was deliberating whether to pursue sanctions against the firm.

Egan-Jones, based in Haverford, Pennsylvania, is one of about 10 firms registered with the SEC as a nationally recognized statistical ratings organization, meaning companies can use their credit ratings to meet regulatory requirements.

Ratings from the biggest NRSROs, Moody’s Corp. (MCO:US) and McGraw- Hill Cos. (MHP:US)’ Standard & Poor’s unit, are paid by debt issuers, which critics say can introduce bias. Egan Jones’s ratings, by contrast, are paid for by investors.

‘Institutional Bias’

The leak to the press “is powerful additional evidence of an institutional bias against Egan-Jones and the SEC’s clear favoritism towards the conflicted issuer-paid firms,” Egan Jones said in the complaint.

John Nester, an SEC spokesman, declined to comment.

The SEC filed an administrative proceeding against Egan and the firm over claims they misrepresented the firm’s experience rating asset-backed and government securities in a 2008 application to become an NRSRO. Egan-Jones falsely claimed in the application that it had about 150 outstanding ABS issuer ratings and 50 government ratings, the SEC said.

Egan-Jones also falsely stated that it was unaware of whether its subscribers held certain positions in particular securities, the SEC said. In fact, the firm’s salespeople were aware of certain clients’ holdings, and in some instances knew whether clients had long or short positions, according to the administrative proceeding.

In its lawsuit, Egan says it seeks declarations that the SEC may not apply civil penalty provisions from the 2010 Dodd- Frank Act retroactively and that the agency violated the Administrative Procedure Act by authorizing staff to issue a formal order of investigation.

The case is Egan-Jones v. SEC, 12-00920, U.S. District Court, District of Columbia.

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net; Edvard Pettersson in Los Angeles at epettersson@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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