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Moody's defeats whistleblower lawsuit

Posted On: Feb. 5, 2016 12:00 AM CST

(Reuters) — Moody's Investors Service on Thursday won the dismissal of a former managing director's whistleblower lawsuit accusing it of defrauding the U.S. government by failing to downgrade hundreds of thousands of credit ratings quickly enough, fueling the 2008 financial crisis.

Ilya Eric Kolchinsky, who has testified before Congress about his former employer, had accused the Moody's Corp. unit of violating the False Claims Act by issuing bogus ratings for mortgage securities, credit default swaps and collateralized debt obligations in a bid to win more business from issuers.

U.S. District Judge William Pauley in Manhattan, however, ruled that Kolchinsky failed to show that Moody's alleged abuse of its status as a nationally recognized rating agency caused anyone to submit false payment claims to the government.

Pauley also found no basis to conclude that Moody's pushed U.S. officials to give insurer American International Group Inc. an excessively large bailout, or caused banks, insurers and pension funds to rely on its ratings as a justification to underpay premiums to the Federal Deposit Insurance Corp.

Kolchinsky's "sprawling" lawsuit is a "Homeric 'catalog of ships' for the 2008 financial crisis," Pauley wrote. "But government licensure does not transform credit ratings issued to private entities into false claims to the government for payment."

Pauley said Kolchinsky may file an amended lawsuit on the narrow issue of whether New York-based Moody's charged federal agencies to receive its ratings electronically.

Stephen Weiss, a lawyer for Kolchinsky, said his office is reviewing the decision. Kolchinsky was not immediately available to comment. A Moody's spokesman had no immediate comment.

Kolchinsky had worked in Moody's derivatives group prior to his suspension in 2009. He testified that year about Moody's before the House Committee on Oversight and Government Reform, and in 2010 before the Financial Crisis Inquiry Commission.

Kolchinsky, in a separate lawsuit, had accused Moody's of trying to blacklist him from the industry in retaliation for his whistleblowing. He dropped that case in January 2013.

The False Claims Act lets individuals sue on behalf of the federal government and share in recoveries.

Kolchinsky's case suffered a setback in July 2014 when the U.S. Department of Justice decided not to help him pursue it.

The case is U.S. ex rel Kolchinsky v. Moody's Corp et al, U.S. District Court, Southern District of New York, No. 12-01399.