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UPDATE 4-SEC won't pursue fraud case against Moody's

* SEC says computer glitch caused inflated ratings

* Jurisdictional issue cited as reason not to pursue case

* Moody’s shares surge on news, then close down 4 cents (Adds details on case)

NEW YORK, Aug 31 (Reuters) - The U.S. Securities and Exchange Commission decided not to pursue a fraud case against Moody's Corp MCO.N over a computer glitch that inflated ratings on some European debt.

In a statement on Tuesday, the regulator cited uncertainty over its authority to bring the case in the United States as the reason not to press a fraud enforcement action against the parent of Moody’s Investors Service.

The probe arose after it was revealed that a computer coding error caused the rating agency to wrongly assign “Aaa” ratings to complex European products known as constant proportion debt obligations, or CPDOs.

According to the SEC, Moody’s found the problem in January 2007 and fixed it the next month, but waited until January 2008 before changing the underlying ratings, which affected nearly $1 billion of debt.

Moody’s Investors Service, meanwhile, had in the interim applied in June 2007 to register with the SEC as a nationally-recognized statistical ratings organization, or NRSRO, and won that coveted status in September.

The SEC said the decision by Moody’s European ratings committee to leave the wrong ratings intact was “self-serving,” and meant Moody’s was not adhering to the procedures described in its NRSRO application.

Moody’s spokesman Michael Adler said the New York-based company was pleased that the matter has been resolved, and “fully supports the Commission’s message that every rating decision must be based only on credit considerations.”

The company in 2008 disciplined some employees in the CPDO group, including the termination of three managing directors, according to the SEC, and replaced some top executives who oversaw its structured finance business.

In announcing its decision on Moody’s, the SEC also cautioned rating agencies about “deceptive ratings conduct.”

SEC Enforcement Chief Robert Khuzami, in a statement, said it is crucial for raters to have “sufficient internal controls over the procedures they use to determine credit ratings.”

Rating agencies have been widely faulted for contributing to the credit crisis and global recession by issuing high ratings on debt that proved risky.

Moody's main rivals include McGraw-Hill Cos' MHP.N Standard and Poor's, and Fimalac SA's LBCP.PA Fitch Ratings. Warren Buffett's Berkshire Hathaway Inc BRKa.NBRKb.N has long been among Moody's largest investors.

Shares of Moody’s rose as much as 5.1 percent following the SEC news before retreating. They closed Tuesday down 4 cents at $21.14 on the New York Stock Exchange. (Reporting by Jonathan Stempel in New York; Editing by Martha Graybow, Ilaina Jonas and Tim Dobbyn)

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