The only rating agency with any credibility Egan-Jones is about to get its hand slapped by the SEC. An article in Bloomberg called the decision by the SEC pure maliciousness. To put Egan-Jones in context, out of the 9 rating agencies that are officially  recognized, they are the only ones that don’t get paid by the issuers of the securities that they are rating. Therefore not compromised like the others who are mainly funded by Wall St.

The Securities and Exchange Commission, it seems, has finally lost its mind.

In April, motivated by what I consider pure maliciousness, the SEC initiated a “cease and desist” administrative proceeding it deemed “necessary for the protection of investors and in the public interest” against Egan-Jones Ratings Co., a privately owned, 20-person firm based in Haverford, Pennsylvania, and against its principal owner, Sean Egan.

Egan-Jones, founded in 1995, is one of nine ratings companies that the SEC has accredited as “nationally recognized,” allowing the firm to rate the debt of sovereign nations, companies and asset-backed securities, among others. Notably, it is the only one of the nine that gets paid by investors instead of by the issuers of securities.

The bigger and better-known ratings companies — Standard & Poor’s (owned by McGraw-Hill Cos. (MHP)), Moody’s Corp. (MCO) and Fitch Ratings Ltd. — are paid by the Wall Street banks that underwrite the debt securities of corporate issuers. That is, the companies are beholden to the sellers of the products they are supposed to pass judgment on, not the buyers. That’s akin to allowing the Hollywood studios to pay the nation’s film critics for their opinions.

So what could have possibly prompted the action?

Now, incredibly, Egan-Jones is the sole rater that the SEC has decided to attack. The trouble for the firm started on July 16, 2011, when Egan-Jones downgraded the U.S.’s sovereign debt by one notch, to AA+ from AAA. Egan-Jones cited “the relatively high level of debt and the difficulty in significantly cutting spending.” Two days later, the SEC’s Office of Compliance Inspections and Examinations contacted the firm seeking information about its rating decision. (The next month, S&P also downgraded the U.S.’s sovereign debt, but neither Moody’s nor Fitch did.)

Then, on Oct. 12, Egan-Jones received a call from the SEC notifying the firm of a Wells Notice, an indication that it was being investigated. On April 5 of this year, Egan-Jones again downgraded the U.S. sovereign debt, to AA from AA+. On April 19, leaks started emanating from the SEC that it had voted to start an “administrative law proceeding” against the firm. And on April 24, the SEC filed its complaint.

SEC nit picking on technical details in a bid to damage Egan-Jones.

The commission claims that on its 2008 supplemental application to be a “nationally recognized” ratings firm, Egan- Jones “falsely stated” that it had already rated the credit of 150 asset-backed securities and of 50 sovereign-debt issues. The SEC claims Egan-Jones “willfully made these misstatements and omissions to conceal the fact that it had no experience issuing ratings on ABS or government issuers.” The SEC intends to fine Egan-Jones and to possibly censure Sean Egan — neither move would be good for business.

Egan says the SEC is making a mountain out of a molehill. He says the paperwork requirements to comply with the Credit Rating Agency Reform Act, which had been passed by Congress in 2006, was still being worked out, and that the SEC has had no problem with his firm’s annual applications since then.

His lawyer, Alan S. Futerfas, told the Wall Street Journal that the SEC knows that Egan did rate the securities in question but it is “saying he didn’t disseminate it publicly.” Futerfas continued: “It’s a very technical argument the SEC is using; it’s not substantive. There’s nothing in this complaint that suggests or alleges that any rating was without integrity or was not accurate or was not predictive.”

If he is right, that raises a question: Is the SEC retaliating against Egan and his firm for downgrading the U.S. sovereign debt?

Source: Bloomberg