(Reuters) - The Justice Department and multiple states are discussing also suing Moody's Corp for defrauding investors, according to people familiar with the matter, but any such move will likely wait until a similar lawsuit against rival Standard and Poor's is tested in the courts.
Inquiries into Moody's are in the early stages, largely because state and federal authorities have dedicated more resources to the S&P lawsuit, said the sources, who were not authorized to speak publicly about enforcement discussions.
Moody's spokesman Michael Adler and Justice Department spokeswoman Adora Andy declined to comment for this story.
Moody's in the past has defended itself against similar allegations, including a 2011 congressional report that concluded the major ratings agencies manipulated ratings to drive business.
The firm previously said Moody's takes the quality of its ratings and the integrity of the ratings process very seriously. It also said the firm has protections in place to separate the commercial and analytical aspects of its business.
The U.S. Justice Department filed a $5 billion lawsuit against S&P late on Monday and accused it of an egregious scheme to defraud investors in the run-up to the financial crisis, fueled by a desire to gain more business.
Shares of McGraw Hill Cos Inc , which owns S&P, have fallen more than 25 percent since news of the lawsuits. Moody's shares have fallen about 15 percent, even though it was not named in any of this week's actions.
"Don't think Moody's is off the hook," said one law enforcement official.
Another rival, Fimalac SA's Fitch Ratings, is unlikely to face similar action, the sources said, since it is a much smaller player in the U.S. ratings industry. The firm also escaped the brunt of scrutiny from congressional investigators.
In a sign of just how high-stakes the battle is, S&P hired prominent defense attorney John Keker, who has represented everyone from cyclist Lance Armstrong to Enron's Andrew Fastow.
S&P said in a statement on Tuesday that the lawsuit is meritless and said it will vigorously defend itself.
A similar coordinated federal-state action against Moody's would follow lawsuits two states have already filed against the ratings firm. Connecticut, which led the states in this week's actions, sued Moody's and S&P in March 2010.
In January a state court in Hartford denied the last of the preliminary motions Moody's had filed to have the case thrown out. That case and the one against S&P are proceeding to trial in the second half of 2014.
Democratic Senator Richard Blumenthal of Connecticut, who as then-attorney general brought the cases against S&P and Moody's in 2010, said he found rampant abuse across the credit rating industry.
"The difference is one of degree and scale rather than essential modus operandi," Blumenthal said in an interview. "S&P is the largest and they did the most sizeable amount of ratings with the largest profits."
CASE THEORY
Those earlier cases and the more recent ones against S&P are based on a theory that the firms misled investors by stating that their ratings on mortgage products were objective and not influenced by conflicts of interest.
Instead, the lawsuits contend, the firms inflated ratings and understated risks as the housing bubble started to burst, driven by a desire to gain more business from the investment banks that issued mortgage securities.
Framing the cases in that manner steers clear of attacking individual ratings, which have largely been shielded under free speech protections. Instead, the focus is on proving false just one statement S&P made - that its ratings were objective.
Justice weighs action against Moody's
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Justice weighs action against Moody's
