* Relates to alleged misstatements in 2008 application
* Involves record-keeping, past rating experience
* Charges also involve conflicts policy issues
* Egan-Jones lawyer says firm to fight the charges
By Sarah N. Lynch and Karen Freifeld
WASHINGTON, April 19 U.S. securities regulators
have decided to bring an enforcement case against credit-rating
agency Egan-Jones, alleging the firm made material misstatements
in a 2008 regulatory application, the company's lawyer confirmed
Alan Futerfas, an attorney for Egan-Jones, said the company
plans to vigorously contest the Securities and Exchange
Commission's administrative charges, which are expected to be
formally filed sometime next week.
"I think this does a significant disservice to the
investment community," Futerfas said. "I think it is grossly
disproportional to any possible error in any four-year-old
application. And we intend to vigorously contest these
Egan-Jones is among the smallest U.S.-recognized credit
rating firms in an industry dominated by three major agencies --
Moody's, McGraw-Hill Cos Inc's Standard &
Poor's, and Fimalac SA's Fitch.
The firm and its outspoken founder, Sean Egan, have been
scrambling for market share, and have been faster than the other
agencies in downgrading the debt of some developed countries,
including the United States, and certain companies in the wake
of the global financial crisis.
Futerfas added that the SEC will not say in its filings what
specific relief it is seeking. An SEC administrative law judge
will eventually hear evidence and arguments in the case.
The SEC's decision to file charges came after commissioners
voted in a closed-door meeting on Thursday.
The charges are linked to issues in the firm's 2008
application to rate asset-backed and government securities.
The issues include allegedly misrepresenting the firm's
rating experience, conflict-of-interest policy issues, and a
failure to keep certain books and records, people familiar with
the matter said.
The company learned last October about possible SEC charges
after it received a "Wells notice", or a document the SEC issues
to possible defendants when it plans to recommend charges, one
Egan-Jones is one of the few ratings agencies whose services
are paid for by subscribers, rather than the issuers of the
securities it rates.
In its defense to the agency, Egan-Jones previously warned
the SEC that enforcement action could "effectively put out of
business the leading independent, non-conflicted David to the
issuer-paid Goliath," according to documents reviewed by
A 2011 SEC report said that Egan-Jones only has five
analysts and analyst supervisors on staff, compared with ratings
giant Standard & Poor's, which had 1,345 analysts on staff.
The firm has argued that it brings necessary competition to
the ratings agency marketplace, and Sean Egan has lashed out at
the business models of its competitors, saying the issuer-paid
model is like restaurants paying reviewers.
Sean Egan said in an interview on CNBC television on
Thursday that the 2008 application submitted to regulators was
"accurate to the best of my ability."
An SEC spokesman declined to comment.
The ratings from Egan-Jones, which is based in Haverford,
Pennsylvania, usually have little market impact. But in November
it made headlines when it downgraded Jefferies Group
over concerns about euro-zone debt exposure, contributing to a
sell-off in the shares of the midsize investment bank.
The subscriber-paid model, Sean Egan has said, eliminates a
key source of conflict that policymakers have since flagged as a
root of the U.S. housing crisis of 2008, when subprime-related
securities received top ratings from the nation's three leading
There are also critics of the subscriber-paid model, who say
large customers such as fund managers could try to ensure that
their investments do not get downgraded.
The SEC first got authority from Congress to regulate
credit-rating firms in 2006. Under that regime, firms file
applications with the SEC to be dubbed as "nationally
recognized" rating agencies.
SEC regulations require credit-rating firms to maintain
certain books and records, furnish financial reports, disclose
and manage conflicts of interest and establish procedures to
manage the handling of material, non-public information, among
A report by the SEC's inspector general in 2009 cited
problems with a credit-rating firm funded by subscriber fees,
but did not name Egan-Jones by name. People familiar with the
matter, however, confirmed it was referring to Egan-Jones.
The watchdog's report cited suspicions regarding the
accuracy of financial information provided in the
subscriber-model firm's application. The report criticized the
SEC for approving the application and delaying in starting an
inspection of the firm.