Moody's sued over inaccurate subprime-backed bond ratings

NEW YORK – Investors were beginning to line up lawsuits against the rating agencies in July, in the wake of the subprime mortgage market scandal.

According to wire service reports, Linda Huber, chief financial officer of Moody's, is being sued by an investor who said Huber failed to disclose that Moody's assigned "excessively" high ratings to bonds backed by subprime mortgages.

The investor alleges that Moody's investors paid artificially high prices for the rating agency's stock because of Huber's "false and misleading" statements. The investor seeks to represent all investors who bought Moody's stock between October 25, 2006 and July 10 this year, and he asks for unspecified damages.

Moody's, Standard & Poor's and Fitch Ratings have been criticised by investors because their ratings on bonds backed by mortgages to people with poor or limited credit did not reflect the highest default rate in 10 years. Some bonds backed by subprime mortgages fell by more than 50 cents on the dollar this year without their credit ratings changing.

On top of this, according to the investor's lawsuit, Moody's "shocked investors" in mid-July when it announced the downgrading of 399 mortgage-backed securities issued in 2006 and the review of an additional 32 for downgrade, affecting bonds worth approximately $5.2 billion.

Further legal fallout for the rating agencies is expected over the next new months.