A former managing director at Moody's Investors Service on Monday sued the credit ratings company, its parent Moody's Corp. and Chief Executive Raymond McDaniel, alleging they made false and misleading statements about him after he left last year.
Eric Kolchinsky, a former Moody's managing director who previously oversaw credit ratings of debt pools backed by mortgage securities and other assets, left Moody's in mid-September 2009 after complaining to his superiors about what he felt were questionable rating practices for complex securities.
Last fall, Kolchinsky testified before the House Committee on Oversight and Government Reform about his experience at Moody's and his views about how it managed potential conflicts of interest.
In a civil suit filed in federal court in New York Monday, Kolchinsky alleged that in statements made by Moody's before and after his testimony last year, it sought to discredit him "and impugn his integrity, honesty, work and abilities." Kolchinsky also said in the complaint that after Moody's made various statements about him, he has "in effect, been blacklisted by the private-sector financial industry."
"Mr. Kolchinsky has not served his complaint on Moody's," a spokesman for the ratings firm said Monday. "However, we are confident Mr. Kolchinsky has no basis for any suit against Moody's."
At Moody's, Kolchinsky ran a group in New York that assigned credit ratings to mortgage debt pools known as collateralized debt obligations before the onset of the financial crisis. In September 2007, he raised concerns to his superiors about high ratings Moody's was planning to give to new mortgage CDOs while it was reviewing many securities backing the CDOs for downgrades, he has previously said. After he flagged those issues, Moody's adjusted its ratings approach, the complaint said. The instruments have since had large-scale downgrades and caused hundreds of billions in losses.
A few weeks after Kolchinsky raised red flags about Moody's CDO ratings, it transferred him to a nonratings division that provided analytical services for debt securities, according to a memo he wrote that Congress made public last year. In 2008, Kolchinsky filed an internal complaint within Moody's about what he considered to be retaliation by it, the memo also said.
In 2009, Kolchinsky submitted another complaint within Moody's about ratings it assigned to complex securities tied to corporate loans. He wasn't involved in rating those particular securities but alleged in a letter to the chief compliance officer at Moody's that it knowingly assigned inflated ratings to them, after he reviewed some of its internal reports. In September 2009, he was suspended and resigned shortly afterward.
After Kolchinsky left Moody's and went public with the allegations, the company said in a statement to media outlets that he had made an "evolving series of claims of misconduct." Moody's said its reviews of those claims, as well as reviews undertaken by law firms it engaged to look into the matter, found that they were "unsupported." McDaniel also said in a conference call with analysts in late 2009 that Kolchinsky's allegations "were not supported by the facts and were without merit."
Kolchinsky is now challenging those assertions. He is seeking damages of at least $15 million.