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No Whistleblower Award in Moody’s $864Mn Settlement

March 5, 2017

Ilya Eric Kolchinsky, a former managing director with Moody’s Investors Service, lost his battle to collect a whistleblower award on a recent $864 million settlement. Kolchinsky accused Moody's of issuing inflated ratings for mortgage securities, CDSs (credit default swaps) and CDOs (collateralized debt obligations) leading up to the 2008 credit crisis, and he provided information to federal investigators.


However, in the eyes of U.S. District Judge William Pauley, Kolchinsky failed to show that Moody’s violated the federal False Claims Act, largely on the basis that the government kept paying for its ratings even after learning they might be compromised. Government prosecutors opted not to join Kolchinsky's lawsuit, which left him to pursue the case on his own.


Instead, the Justice Department filed its claim under the federal Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA, and joined attorneys general from 21 states and the District of Columbia who filed claims under their respective state laws. As part of the settlement, Moody's acknowledged that it had not followed its own rating standards, but did not admit liability.


In his ruling, Judge Pauley wrote the following:


"This court is particularly sympathetic to Kolchinsky's position in light of the serious and far-reaching effects that Moody's conduct had on the American economy."


"This observation does not, however, cure the deficiencies in Kolchinsky's pleadings or enable him to collect a share of the FIRREA settlement."