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SEC investigation blasts credit-rating companies

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Bloomberg News / July 9, 2008

WASHINGTON - A Securities and Exchange Commission investigation into credit-rating companies found the firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

A 10-month review of Moody's Investors Service, Standard & Poor's, and Fitch Ratings found analysts contributed to fee discussions and weighed losing clients over certain ratings, the SEC said in a report yesterday. Employees also cast doubt on the quality of some ratings, the SEC said, declining to link firms to findings.

"We uncovered serious shortcomings at these firms," SEC chairman Christopher Cox said. "When there were not enough staff to do the job right, the firms sometimes cut corners."

Lori Richards, the head of the SEC's inspections unit, said her office discussed its findings with the agency's enforcement division, which probes and prosecutes wrongdoing.

That allows the division to "come to their own conclusion about whether an enforcement action is appropriate," Richards said.

"Even though the SEC doesn't name names, these findings show searing abuse by the rating agencies," said Senator Charles Schumer, a New York Democrat. "The next step needs to be to look at enforcement measures."

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