Moody's Asks Municipalities to Indemnify Firm From Legal Action on Ratings

Moody’s Investors Service is asking local governments to indemnify the bond-rating company and its executives from legal action connected to its ratings except for instances of fraud or willful misconduct.

New York-based Moody’s, whose founder John Moody created credit ratings in 1909, included the language in an application and fee waiver in July, said Tim Firestine, the chief administration officer of Montgomery County, Maryland, which has the highest-possible bond rating. He said the bond rater also hiked fees to $98,400 from $61,000.

“The fees jumped considerably from what they were before, and then they ask us to indemnify them,” Firestine said. “What they’re saying is, we’re going to charge you more. We’re going to make you indemnify us so that if you give us information we rely upon, or if something happens, you pay.”

The U.S. financial-regulation overhaul enacted in July lowered the threshold in liability standards that bond raters Moody’s, Standard & Poor’s, Fitch Ratings and others face against investors who sue the firms. Congress intended the change to increase due diligence at the ratings companies in the face of increased legal liability, according to Piper Jaffray analyst Peter Appert.

“The undersigned will indemnify and hold harmless Moody’s and all of its directors, officers, employees, agents and affiliates from any claims of whatever nature (whether foreseeable or not) arising from or in connection with this Application and Fee Schedule,” according to the Moody’s document sent to Firestine. “The terms of this paragraph shall not apply to the extent that any such claim arises by reason of any fraud or willful misconduct on the part of Moody’s.”

Representatives from Moody’s weren’t immediately available for comment.

‘Some Concern’

“There is some concern about the indemnity clause,” said Susan Gaffney, the director of the Washington office of the Government Finance Officers Association, a public officials group. “We’re trying to get to get clarification from Moody’s about these contracts so that we can provide guidance to our members.”

Firestine said attorneys are reviewing Moody’s request, which he said he doesn’t think he’s allowed to sign under state law. Nevertheless, he said he was rattled by the request from Moody’s, whose credit ratings are key. “It was a bit intimidating,” he said.

The story was first reported in the Bond Buyer today.

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; William Selway in Washington at wselway@bloomberg.net

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