SEC settles with upstart Egan-Jones

Egan-Jones Ratings Managing Director Sean Egan testifies on Capitol Hill in Washington, Wednesday, Oct. 22, 2008, before the House Oversight and Government Reform Committee. (Associated Press)

Egan Jones Rating Co., the Haverford credit-ratings firm founded by Sean Egan, a vocal critic of larger rivals Standard & Poor's and Moody's relentless exaggeration of mortgage-bond credit quality leading up to the 2008 U.S. financial crash, says it has settled the SEC's ensuing complaint about the firm's 2008 regulatory application "on mutually agreeable terms."

Egan-Jones has agreed to stop rating asset-backed and sovereign-backed debt for the next 18 months; it will continue to rate "corporate, bank, financial and insurance securities" for its investor clients, Wiliam Hassiepen, vice president and co-manager of Egan-Jones' rating desk, told me, confirming the SEC's account of the deal. The SEC also said it could extend the bar if it's not satisfied its conditions are being met.

The SEC had accused Egan-Jone of "falsely stating," in a 2008 application for permission to join S&P and Moody's as a "self-regulating" ratings agency, that it had properly rated 150 asset-backed securities and 50 foreign-government-backed securities -- while failing to note those ratings had not been "made available through the Internet" or other public means, as was required of self-regulating ratings agencies.

Egan had previously complained the SEC had singled out his small agency, which warned mortgage-backed securities were vulnerable to poor credit and falling home prices in the years before the 2008 collapse, for a paperwork error, while failing to hold the larger firms most investors relied on responsible for giving high ratings to bonds whose collateral turned out to be worthless or overvalued.

"The firm is most satisfied that the matter is resolved and behind us," Egan, who is traveling in Asia, said in a statement. "This settlement allows Egan Jones to focus all of our efforts and resources on what we do best - producing the most timely, accurate and independent ratings in the business."

In a separate statement, lame-duck SEC envorcmeent chief Robert Khuzami called Egan-Jones' application errors a "serious violation" and said Egan has promised not to do it again.