* Ilya Eric Kolchinsky may pursue retaliation claim
* Moody's wins dismissal of defamation, other claims
* Kolchinsky welcomes decision -- lawyer
* No immediate comment from Moody's
By Jonathan Stempel
Feb 28 Moody's Investors Service was
ordered to defend against a lawsuit by a whistleblowing former
analyst who claimed it illegally retaliated against him for
questioning its ratings practices for risky mortgage debt.
A federal judge said Ilya Eric Kolchinsky may pursue his
claim that the credit rating agency and its parent Moody's Corp
violated the Sarbanes-Oxley corporate governance law
through several employment actions, including cuts in pay and
responsibilities, ending with his September 2009 suspension.
"Kolchinsky has sufficiently alleged that Moody's took
'unfavorable personnel action' against him after he reported
what he believed were potential violations of the federal
securities laws and SEC rules," U.S. District Judge Paul Crotty
wrote, referring to the U.S. Securities and Exchange Commission.
Crotty, however, also dismissed Kolchinsky's other claims,
in a decision made public on Tuesday. Kolchinsky in these claims
alleged defamation, intentional infliction of emotional
distress, and that Moody's tried to blacklist him from the
Kolchinsky had been a managing director in Moody's
derivatives group, overseeing ratings for so-called asset-backed
securities collateralized debt obligations in the United States.
Following his suspension, he testified before the U.S. House
Committee on Oversight and Government Reform during its
investigation of credit rating agencies.
Todd Krouner, a lawyer for Kolchinsky, said his client
welcomed Crotty's decision, citing the need to let financial
analysts "do their work without the fear of retaliation," and in
light of Moody's "central role in the financial crisis."
Moody's also welcomed the decision.
"We are extremely pleased that the court dismissed all but
one of the plaintiff's claims, and we are confident that we will
prevail on the remaining claim once the court has looked at all
of the facts," said Moody's spokesman Michael Adler.
The lawsuit is one of many to focus on the methods by which
credit rating agencies assigned high ratings, often "triple-A,"
to risky mortgage debt. It is one of the more rare cases in
which an agency has been targeted by a former employee.
Kolchinsky contended that after he first questioned Moody's
rating methods in 2007, the New York-based company cut his
salary and bonus, excluded him from meetings, and took away
opportunities for promotion.
He said his suspension was provoked by his alleged failure
to cooperate with a probe by an outside law firm that he called
a ruse to "white-wash" Moody's alleged fraud.
This suspension amounted to a "constructive termination"
because Moody's told him to stop work; ordered him to return
computers, cell phones and ID cards; and removed his name from
internal and external directories, Kolchinsky said.
In rejecting the defamation claim, Crotty said the alleged
improper statements by Moody's and its chief executive, Raymond
McDaniel, "indicate only that Kolchinsky did not wish to
cooperate with the company's investigation, and that it
concluded his claims were unsupported.
"It was reasonable for Moody's to make these statements in
its own defense after Kolchinsky's public testimony against the
company," the judge added.
According to his LinkedIn profile, Kolchinsky is now a
consultant for the National Association of Insurance
Commissioners and the Wisconsin insurance commissioner.
The case is Kolchinsky v. Moody's Corp et al, U.S. District
Court, Southern District of New York, No. 10-06840.