The Securities and Exchange Commission (SEC) has charged credit rating agency Egan-Jones Ratings Co. (EJR) and its owner and president Sean Egan for material misrepresentations and omissions in their July 2008 application to register as a Nationally Recognized Statistical Rating Organization (NRSRO) for ABS and government securities issuers.
EJR and Egan also are charged with material misrepresentations in other submissions submitted to the SEC and violations of record-keeping and conflict-of-interest provisions governing NRSROs.
The SEC issued an order instituting proceedings where the SEC’s division of enforcement alleges that EJR – based in Haverford, Pa. – submitted an application to register as an NRSRO for issuers of ABS and government securities in July 2008. Before this, EJR had registered with the SEC in 2007 as an NRSRO for financial institutions, insurance firms, and corporate issuers.
The SEC division alleges that in its 2008 application, EJR said falsely that as of its application date, it had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings. EJR also falsely claimed in the same application that it had been issuing credit ratings in the ABS and government areas as a credit rating agency on a continuous basis since 1995.
However, at the time of its July 2008 application, EJR had not issued – that is, made available on the Web or via another readily accessible means – any ABS or government issuer ratings. Thus the agency did not meet the requirements for registration as an NRSRO in these categories.
EJR continued to make material misrepresentations about its experience in rating ABS and government securities in annual certifications provided to the SEC submitted later.
The SEC division also said that EJR made other misstatements and omissions in submissions to the SEC by offering inaccurate certifications from clients while not disclosing that two employees had signed a code of ethics different than the one EJR disclosed, and inaccurately stating that EJR had no knowledge if subscribers were long or short a particular security.
The divison also said that EJR violated other SEC provisions governing NRSROs. EJR did not enforce its policies to address conflicts of interest from employee ownership of securities, and allowed two analysts to be part of determining credit ratings for issuers whose securities they owned.
Additionally, EJR did not make and retain certain required records such as a detailed record of its procedures and credit rating methodologies as well as e-mails about its determination of credit ratings.
The SEC division also accused Egan of offering inaccurate data that was included in EJR’s applications and annual certifications. He signed the submissions and certified that the data offered 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 division also alleged that by the conduct described above, Egan willfully made, or caused EJR to make, material misstatements in its form NRSRO, and caused abetted, counseled, commanded, induced or procured EJR to violate provisions of the Securities and Exchange Act of 1934.