Egan-Jones Ratings Co. and Sean Egan ‘Falsified’ Application As Rating Organization
Egan-Jones Ratings Company (EJR) and its owner and president Sean Egan made material misrepresentations and omissions in its July 2008 application to register as a Nationally Recognized Statistical Rating Organization (NRSRO) for issuers of asset-backed securities (ABS) and government securities.
The US Securities and Exchange Commission has also charged EJR and Egan with material misrepresentations in other submissions furnished to the SEC and violations of record-keeping and conflict-of-interest provisions governing NRSROs.
The SEC’s Division of Enforcement alleges that EJR — a credit rating agency based in Haverford, Pa. — submitted an application to register as an NRSRO for issuers of asset-backed and government securities in July 2008. Accordingly, EJR falsely stated that as of the date of the application it had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings.
EJR further falsely stated in its 2008 application that it had been issuing credit ratings in the ABS and government categories as a credit rating agency on a continuous basis since 1995.
In fact, the SEC said, at the time of its July 2008 application, EJR had not issued — that is, made available on the Internet or through another readily accessible means — any ABS or government issuer ratings, and therefore did not meet the requirements for registration as an NRSRO in these categories. EJR continued to make material misrepresentations regarding its experience rating asset-backed and government securities in subsequent annual certifications furnished to the SEC.
EJR had previously registered with the SEC in 2007 as an NRSRO for financial institutions, insurance companies, and corporate issuers.
The SEC’s Division of Enforcement also alleges that EJR made other misstatements and omissions in submissions to the SEC by providing inaccurate certifications from clients, failing to disclose that two employees had signed a code of ethics different than the one EJR disclosed, and inaccurately stating that EJR did not know if subscribers were long or short a particular security.
The SEC’s Division of Enforcement further alleges that EJR violated other provisions of Commission rules governing NRSROs. EJR failed to enforce its policies to address conflicts of interest arising from employee ownership of securities, and allowed two analysts to participate in determining credit ratings for issuers whose securities they owned.
EJR also failed to make and retain certain required records, including a detailed record of its procedures and methodologies to determine credit ratings and e-mails regarding its determination of credit ratings.
The SEC’s Division of Enforcement alleges that Egan provided inaccurate information that was included in EJR’s applications and annual certifications. He signed the submissions and certified that the information provided in them was “accurate in all significant respects,” when he knew that it was not. Egan also failed to ensure EJR’s compliance with the recordkeeping requirements and conflict-of-interest provisions.
The SEC’s investigation was conducted by Stacy Bogert, Pamela Nolan, Alec Koch, and Yuri Zelinsky. The SEC’s litigation will be led by James Kidney.