In re Moody's Corporation Securities Litigation; 18 February 2009 Order

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK-----------------------------------Xxx 07 CV. 8375 (SWK)xIn re MOODY’S CORPORATION x

OPINION AND ORDER

SECURITIES LITIGATION xxxx-----------------------------------X

SHIRLEY WOHL KRAM, U.S.D.J.I.

BACKGROUND

In this putative class action, the Teamsters Local 282Pension Trust Fund, Charles W. McCurley, Jr., and Lewis Wetstein(collectively, “Plaintiffs”) bring securities fraud claimsagainst the Moody’s Corporation (“Moody’s” or the “Company”),Moody’s Chief Executive Officer (“CEO”) Raymond W. McDaniel Jr.,Moody’s Chief Operating Officer (“COO”) Brian M. Clarkson, andMichael Kanef, Group Managing Director of Moody’s U.S. AssetFinance group (collectively, “Defendants”) on behalf of allother persons and entities who acquired securities issued byMoody’s from February 3, 2006 to October 24, 2007 (the “ClassPeriod”). Pending before the court is Defendants’ motion todismiss brought pursuant to Federal Rules of Civil Procedure12(b)(6), and 9(b), and the Private Securities Litigation ReformAct of 1995 (“PSLRA”). For the following reasons, the motion todismiss is granted in part and denied in part.

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A.

Procedural History

On July 19, 2007, Nach v. Huber, the first of severalputative class actions alleging securities fraud againstMoody’s, was filed in the U.S. District Court for the NorthernDistrict of Illinois. 08 Cv. 1536 (SWK). This action wastransferred to the Southern District of New York; the Courtconsolidated it with all related securities cases pending inthis District, and appointed Plaintiffs to represent theputative class. In re Moody’s Corp Sec. Litig., 07 Cv. 8375(SWK), Dkt. No. 7.Plaintiffs’ Consolidated Amended Complaint (the “AC”)alleges that Moody’s made material misrepresentations andomissions in public statements respecting: (1) Moody’s business,business conduct, and independence; (2) the meaning of Moody’scredit ratings; (3) the method of Moody’s credit ratings; and(4) the manner in which Moody’s had generated financial resultsand growth. See 07 Cv. 8375 (SWK), Dkt. No. 9. It also allegescontrol liability for defendants McDaniel, Clarkson, and Kanef(collectively, “Individual Defendants”) under § 20(a) of theSecurities Exchange Act of 1934 (“Exchange Act”). Defendantsthen filed the motions to dismiss that are the subject of thisOpinion.

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B.

FACTUAL ALLEGATIONS

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Credit Ratings and the Structured Finance Market

Credit markets are a financial market where securities anddebt instruments are bought and sold. For credit markets tooperate, buyers and sellers must be able to evaluate the credit-worthiness, or expected loss, of a given security or debtinstrument. For over one hundred years, Moody’s has evaluated,rated, and provided credit ratings for securities and debtinstruments. (AC ¶¶ 10, 12.) During the class period, it was oneof a handful of United States based Nationally RecognizedStatistical Rating Organizations (“NRSRO’s”). (AC ¶ 11.)The credit markets rely on credit ratings organizationssuch as Moody’s and other NRSRO’s to evaluate and rate thecountless securities and debt instruments traded in globalcapital markets. In addition, the credit rating given to aparticular security impacts its rate of interest (the higher thecredit rating, the lower rate of interest the issuer has to payto whomever buys its debt). During the class period, Moody’scontrolled approximately 40% of the credit rating market; theother 60% was divided largely between two competitors: Standardand Poor’s (“S&P”) and Fitch Ratings.

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Plaintiffs’ principal allegations are summarized in thissection. This summary accepts these allegations and factualassertions as true, but in no way constitutes factual findingsby the Court.

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