Ratings Company, Founder Settle with SEC
Egan – Jones Ratings Company and Sean Egen, its founder and president, settled Commission administrative proceedings, ending months of contentious litigation. In the Matter of Egan-Jones Ratings Company, Adm. Proc. File No. 3-14856 (Jan. 22, 2013). The proceeding centered around claims that the firm and its founder provided false information in an application to register as a nationally Recognized Statistical Rating Organization or NRSRO. Shortly after the proceeding was brought Egan – Jones and Mr. Egan filed suit against the SEC to block the administrative proceeding claiming that they could not receive a fair hearing in that forum. Egan-Jones Rating Company v. U.S. Securities and Exchange Commission, Case No. 1:12-cv-00920 (D.D.C. Filed June 6, 20120).
The administrative proceeding: Respondents, according to the Order, claimed in a July 2008 application to register as an NRSRO regarding asset-backed securities and government securities that the firm had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings. In fact at the time of the application the firm had not made available on the Internet or through another readily accessible means any ABS or government issuer ratings. Misrepresenting its experience in an effort to register with respect to these two classes violated Exchange Act Section 15E(B)(2), the Order claimed.
The Order alleged, in addition, a series of other violations including:
· That the firm falsely stating it was unaware of whether subscribers held positions in certain securities;
· The failure of the firm to enforce its policies to address conflicts of interest arising from employee ownership of securities;
· The failure of the firm to make or retain a record of the procedures and methodologies used to determine credit ratings; and
· The failure of the firm to maintain e-mails regarding its determination of credit ratings for about 18 months after registering as an NRSRO.
Mr. Egan caused the violations, according to the Order.
The suit against the SEC: The firm and Mr. Egan fought back, claiming that the proceeding was the result of a flawed process and that a fair trial could not be had in the administrative forum. The Order instituting the administrative proceeding was, according to the complaint, the product of a defective, bias and tainted process. After reciting a linty of facts and wrongful conduct the complaint demanded an order removing the proceeding to Federal Court and other relief.
The settlement: The firm and its founder have resolved the administrative proceeding. After agreeing the firm would adopt a series of procedures to remedy the deficiencies cited in the Order the settlement provides that:
· Each Respondent consent to the entry of a cease and desist order based on Exchange Act Sections 15E(a)(1), 15E(b), 15E(h)(1) and 17(a);
· The firm’s NRSRO registration for the classes of issuers of ABS and government securities would be revoked;
· Mr. Egan would be barred from association with any NRSRO registered in either of the two classes involved in the case for 18 months with any reapplication being subject to certain standards; and
· In the event either Respondent issues or maintains any credit ratings for either of the classes of securities involved here they will disclose that such ratings are not issued or maintained by a registered NRSRO. In addition, the firm will list its non-NRSRO credit ratings separately on its website and identify them as such and state that it is not an NRSRO registered with respect to the two classes of securities involved in the case. The firm also agreed to send a written notification to its subscribers stating that it is not a registered NRSRO with respect to ABS and government securities.
Finally, Respondents agreed to pay a civil penalty of $30,000. The civil suit against the Commission, while still pending, presumably will be dismissed.