July 23 (Bloomberg) -- Moody’s Corp., whose founder, John Moody, created credit ratings in 1909, fell 3.8 percent after Warren Buffett’s Berkshire Hathaway Inc. reduced its stake in the firm by 17 percent.

Buffett’s company sold about 8 million shares of Moody’s this week, Omaha, Nebraska-based Berkshire said yesterday in a regulatory filing. Berkshire remains Moody’s largest shareholder, according to Bloomberg data.

Moody’s and rival ratings firms Standard & Poor’s and Fitch Ratings have been targets of criticism from investors and lawmakers including Senate Banking Committee Chairman Christopher Dodd, who has said the companies wrongly assigned top credit rankings to subprime-mortgage bonds just before that market collapsed. Buffett himself has said Moody’s damaged its brand as ratings proved inaccurate.

“Their business is their reputation, and that reputation has been tarnished,” said Glenn Tongue, a partner at T2 Partners LLC, which is betting that Moody’s shares will decline and counts Berkshire as its largest holding. “The importance of their ratings has diminished over time.”

Moody’s fell $1 to $25.52 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have plunged by more than half in the past two years as the ratings firm has reported seven straight quarterly profit declines.

Buffett, chairman and chief executive officer of Berkshire, said at the firm’s May 2 annual meeting that he still believes assigning ratings to debt “is a good business” because of the limited number of competitors.

Common Mistake

“They made a mistake that many, many people made,” Buffett told shareholders. “There was almost a total belief throughout the country that house prices certainly wouldn’t fall significantly.”

Buffett sold the shares over three days beginning July 20 for prices ranging from about $28.73 to $26.59, a separate filing said.

Berkshire still holds about 40 million Moody’s shares, about 17 percent of the outstanding stock, the filing said. That’s down from just above 20 percent as of March 31. U.S. accounting rules require firms to account for holdings differently when they own more than one-fifth of a company’s shares -- a position Berkshire found itself in after Moody’s repurchased shares from other investors to reduce the total amount outstanding.

‘Uncomfortable’

The accounting requirements may have contributed to Berkshire’s decision to reduce its stake, said Michael Quigley, a portfolio manager at Wedgewood Partners Inc. in St. Louis. Wedgewood invests about 7.8 percent of its $500 million of assets in Berkshire shares, making it its second-largest holding.

“There’s definitely that legislative threat, lawsuits are definitely on the horizon,” Quigley said. “But it’s probably more them being uncomfortable owning more than 20 percent.”

The Obama administration July 21 proposed setting limits and disclosure requirements on credit-rating companies aimed at reducing conflicts of interest and providing more information about investment products. Connecticut’s attorney general, Richard Blumenthal, said last year he was investigating possible conflicts concerning Berkshire’s bond-insurance unit and its Moody’s holdings.

Blumenthal called the stake a “clear and direct conflict of interest” after Moody’s gave new bond insurer Berkshire Hathaway Assurance Corp. its top rating. A favorable Moody’s rating for Berkshire or a lower rating for a competitor could give Buffett’s firm an advantage. Buffett said at the time that he had no contact with Moody’s management.

Profit Falls

The firm in April cut its credit rating for Berkshire two levels to Aa2, and Blumenthal has provided no update on his efforts since. He didn’t return a call for comment today. Michael Adler, a spokesman for Moody’s, declined to comment on the stock sale. Buffett didn’t respond to a message seeking comment.

Moody’s said in April that net income fell 25 percent to $90.2 million in the first quarter. It hasn’t reported second- quarter results.

Buffett, 78, disclosed a 24 million-share stake in Moody’s predecessor, Dun & Bradstreet Corp., in 2000. The shares, obtained at a cost of $499 million according to regulatory filings, split in May 2005. The Moody’s stake was valued at more than $1.2 billion before the stock sales disclosed yesterday.

“It’s been a successful investment” for Berkshire, Tongue said. “He’s made some money there.”

Goldman Sachs

Asked about the possibility of selling Moody’s shares in an interview with CNBC in March of 2008, Buffett answered that it is difficult for Berkshire to decrease a position in a declining stock or add to holdings of a rising one because of the size of its portfolio.

Buffett last year sold stock in firms including Procter & Gamble Co., Johnson & Johnson and oil producer ConocoPhillips to fund investments in preferred shares of Goldman Sachs Group Inc. and General Electric Co.

To contact the reporters on this story: Erik Holm in New York at eholm2@bloomberg.net; Bryan Keogh in New York at bkeogh4@bloomberg.net.

Last Updated: July 23, 2009 17:00 EDT