Moody's shares slide on lawsuit worries

Fri Feb 8, 2013 1:00pm EST
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By Jochelle Mendonca

(Reuters) - Shares in credit rating agency Moody's Corp (MCO.N: Quote) slid 6 percent on Friday as the prospect of a federal fraud lawsuit over its pre-crisis debt ratings overshadowed a 66 percent rise in quarterly earnings and a strong 2013 outlook.

The U.S. Justice Department and several states are discussing suing Moody's for defrauding investors, people familiar with the matter told Reuters, but any such move will likely wait until the lawsuit against rival Standard & Poor's is tested in the courts.

The U.S. government launched a $5 billion civil suit last week against S&P and its parent, McGraw-Hill Companies Inc MHP.N, over mortgage bond ratings.

"If the question has become when, and not if, a lawsuit will be filed against Moody's, then the shares are simply unbuyable, in our view," BTIG analyst Mark Palmer said.

Moody's and S&P have faced criticism from investors, politicians and regulators for assigning high ratings to thousands of subprime and other mortgage securities that turned sour.

On a post-earnings conference call, Moody's Chief Executive Raymond McDaniel said the company had not been named in the S&P lawsuit and routinely receives requests for information from state attorneys general.

"We don't have any knowledge of any pending complaint by the Department of Justice raising similar claims against Moody's," McDaniel added.

Moody's already faces fraud claims filed from private investors. Abu Dhabi Commercial Bank, King County in Washington state and other investors are suing the company over losses in Cheyne, a structured investment vehicle.   Continued...