CHICAGO -- A group of black and Hispanic employees at Moody's Investors Service won the first round of a racial discrimination lawsuit against the rating agency when a U.S. magistrate in New York recommended late last month that the litigation be certified as a class action suit.

The recommendation by Magistrate James C. Francis IV is now in the hands of U.S. District Court Judge Whitman Knapp, who must decide whether or not to allow the litigation to proceed as a class action lawsuit.

"It's a clear-cut victory," said Leonard Flamm, an attorney representing three black and two Hispanic current and former Moody's employees who filed the discrimination suit against the rating agency in December 1992.

A sixth plaintiff in the lawsuit reached a settlement with Moody's and has been dismissed from the case.

The suit, which asks for back pay, damages, injunctive relief, and attorney fees, claims that Moody's has "engaged in a series of unlawful employment acts and practices that have resulted in the disparate adverse treatment" of black and Hispanic employees. The suit alleges that those employees were demoted, passed over for promotions, or denied transfers to jobs that could lead to opportunities for promotion.

Flamm said the magistrate's recommendation in his clients' favor shows that there is sufficient evidence of discrimination to allow the case to proceed as a class action.

But John Giansello, an attorney representing Moody's, said the recommendation means "nothing of the kind," calling Flamm's statements "hyperbole and rhetoric."

Flamm said the recommendation will probably be upheld by Judge Knapp.

Giansello said the judge could reject or amend the magistrate's recommendation and that even if it is accepted, the class certification could be revoked at any time during the litigation.

Still, Flamm said the positive recommendation will allow the litigation to proceed, acknowledging that the suit's "raison d'etre would be adversely affected" without a class certification.

Flamm presented statistical evidence to the magistrate that indicated a higher percentage of white and Asian employees at Moody's had been promoted than black and Hispanic employees. The evidence showed that while blacks and Hispanics made up 25.84% of Moody's work force, they were only given 20.55% of the promotions.

In his June 30 report to Judge Knapp, Magistrate Francis said that while the statistical evidence "clearly" reveals a difference in promotion rates between the two groups, it "does not give rise to the further inference that this differential is the result of intentional racial discrimination."

However, Francis said that anecdotal evidence, supplied in the form of affidavits from 16 Moody's employees, could support that inference.

Giansello said that the magistrate's recommendation was "not entirely unfavorable" to Moody's because the magistrate did not accept the statistical evidence presented. In addition, Giansello said anecdotal evidence has not yet been subject to discovery and cross examination.

"Regardless of this ruling, [Moody's] believes the claim is groundless and that in the end it will be vindicated in this case," he said.

Giansello said the recommendation is being reviewed and that his client's next step has not been determined. While objections to the recommendation are due to be filed in federal court today, Flamm said that he expects Moody's to ask for an extension.

The plaintiffs have identified about 78 potential class members who mainly have worked in Moody's corporate finance and financial information services departments. Flamm said that once the class is certified, that number should grow to at least 150 people and should include current and former employees of Moody's municipal finance department.

The class is defined by the plaintiffs as all black and Hispanic people who currently work at Moody's or who worked there between Dec. 18, 1989, and the date of trial. Of those people, the class would be limited to those in promotable positions who were denied one or more promotions and who had received satisfactory performance evaluations.

The magistrate recommended that 32 of the 78 potential class members identified be placed in a subclass because they signed claim releases against Moody's in return for severance packages.

The magistrate limited the class to employees of Moody's New York City office only.

Moody's unsuccessfully argued that certain employees such as analysts be excluded from the class because of the specialized nature of their work.

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