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Lawsuit challenging Moody's ratings independence is dismissed

A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York, February 6, 2013. REUTERS/Brendan McD
A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York, February 6, 2013. REUTERS/Brendan McD

By Jonathan Stempel

NEW YORK (Reuters) - Moody's Corp and its Chief Executive Raymond McDaniel won the dismissal of a lawsuit accusing the parent of Moody's Investors Service of defrauding shareholders by making false statements about the independence and objectivity of its credit ratings.

In a decision made public on Friday, U.S. District Judge George Daniels in Manhattan said the shareholders failed to show a sufficient link between the alleged misstatements and declines in Moody's share price.

The lawsuit by the Teamsters Local 282 Pension Trust Fund of Lake Success, New York and two individuals, Charles McCurley and Lewis Wetstein, concerned alleged conflicts of interest in Moody's "issuer-pays" model, where debt issuers pay for ratings.

First brought in 2007, the lawsuit accused Moody's of inflating its share price by having made statements in its code of conduct, regulatory filings and to the press that concealed conflicts in how it rated structured finance securities.

It said a series of events brought these conflicts to light, and hurt Moody's share price.

These events allegedly included an August 2007 statement by Alabama Sen. Richard Shelby that rating agencies deserve some blame for the U.S. housing crisis, and Moody's October 2007 release of quarterly results and a subsequent analyst downgrade.

They also allegedly included a May 2008 article about Moody's failure to correct a known computer glitch that led to false ratings on complex European debt products known as constant proportion debt obligations.

Daniels, however, concluded that none of these events was linked closely enough with alleged misstatements about Moody's ratings independence to justify a securities fraud claim.

"Plaintiffs fail to establish a connection between the loss-causing events and the actual share price declines as required to survive summary judgment with respect to loss causation," Daniels wrote.

Ira Press, a lawyer for the plaintiffs, did not immediately respond to requests for comment.

Moody's spokesman Michael Adler said the New York-based company is pleased with the court's decision.

The case is unrelated to lawsuits brought in February by the U.S. government and many states accusing McGraw Hill Financial Inc's Standard & Poor's of misleading investors by inflating its credit ratings. S&P has denied wrongdoing.

The case is In re: Moody's Corp Securities Litigation, U.S. District Court, Southern District of New York, No. 07-08375.

(Reporting by Jonathan Stempel in New York; Editing by Carol Bishopric)

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