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 industry.
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.