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January 16, 2017

Pennsylvania to receive $19.4 million in massive Moody's settlement

The state of Pennsylvania will receive approximately $19.4 million as part of a massive settlement in the U.S. Department of Justice investigation into Moody's Corporation's alleged unfair and deceptive business practices in its rating of mortgage-backed securities.

Acting Pennsylvania Attorney General Bruce Beemer announced Monday that the $863.7 million settlement will reward Pennsylvania with funds to be distributed to state agencies that were impacted by Moody's alleged conduct.

"This is a landmark settlement that will result in meaningful reforms by Moody’s and a significant recovery of funds for many Commonwealth agencies," Beemer said.

Another 21 states and the District of Columbia were also part of the broader investigation of Moody's mortgage rating practices, regarded as an influential factor in the buildup to the 2008 financial crisis.

Investigators accused Moody's of downplaying the risk level of its Aaa rating in its dealings with investors and communication with consumers. The agency allegedly manipulated its rating process to heighten the risk of Aaa-rated finance securities, including mortgage-backed securities and collateralized debt obligations, at the behest of powerful banks seeking to sell them to institutional investors such as pension and retirement plans.

Even as Moody's touted its independence and objectivity, the Department of Justice found, it allowed its analysis to be swayed by the opportunity to milk clients with inflated ratings on toxic assets sold by Wall Street investment banks. The alleged misconduct began around 2001 and hit a peak between 2004-2007, investigators said.

In addition to the monetary settlement, Moody's has agreed to a detailed statement of facts surrounding its conduct and will submit to stringent new compliance terms.

Pennsylvania's Bureau of Consumer Protection will disperse the $19.4 million to the Pennsylvania Department of Treasury, the Public School Employees Retirement System (PSERS), the State Employees Retirement System (SERS) and the Pennsylvania Turnpike Commission. 

Combined with funds from the $1.4 billion settlement with Standard and Poor's in 2015, Pennsylvania has received more than $40 million from credit rating agencies to resolve allegations of deceptive conduct.

New Jersey, which was also part of the global settlement, will receive $15.2 million.

Fines and settlements in connection with the 2008 financial crisis, particularly those paid by big banks, had surpassed more than $160 billion by mid-2016.