Egan-Jones Ratings Company, also known as EJR, was founded in 1995 and actively rates the credit worthiness of approximately 2000+ high yield and high grade U.S. corporate debt issuers. Egan-Jones positions itself as unique among nationally recognized statistical rating organizations for being wholly investor-supported, a structure designed to minimize the potential for conflicts of interest in assessing credit quality.
History
The firm was granted NRSRO status on December 21, 2007, making it the ninth such organization to be recognized by the SEC. The effectiveness of Egan-Jones' investor-supported credit ratings has been measured by third parties, including Richard D. Johnson of the Kansas City Federal Reserve, the Stanford UniversityBusiness School and the University of Michigan's Business School. Sean Egan, principal of Egan-Jones Rating, appeared before Congress on October 22, 2008 and argued that issuers of complex securities "shopped" for ratings which resulted in a race to the bottom in terms of credit transparency. Rather than "beat up Moody's and S&P for behavior" they'd been financially motivated to pursue, the government needs to support a new business model paid for by investors, not issuers, to support the funding ecosystem which has so severely broken down, he asserted. Egan-Jones on July 16, 2011, became the first NRSRO to cut its rating on the United States from AAA to AA+. On April 5, 2012, Egan-Jones downgraded the credit ranking of the United States for the second time from AA+ to AA assuming that the debt will reach $16.7 trillion by the end of 2012 while the GDP will not grow further $15.7 trillion limit and the debt to the GDP ratio will reach 112% of the national GDP which is the highest level since the WW II. On September 14, 2012, Egan-Jones downgraded the credit rating of the United States for the third time from AA to AA-, the lowest of what is considered "high grade", as a reaction to QE3. Egan-Jones was also the first to downgrade WorldCom and Enron.
2012 SEC charges
Charges
The SEC warned Egan-Jones in October 2011 of a possible enforcement action. On April 24, 2012, the SEC charged Sean Egan with numerous offenses including: making false and misleading statements in the firm's application to become a Nationally Recognized Rating Agency, violations of conflicts-of-interest and record keeping, and falsely stating that he was unaware if his paid clients were long or short specific securities that Egan-Jones rated. The Securities and Exchange Commission issued charges against the company, and its founder, Sean Egan, for "material misrepresentations and omissions in the company’s July 2008 application to register as a Nationally Recognized Statistical Rating Organization for issuers of asset-backed securities and government securities" as well as "material misrepresentations in other submissions furnished to the SEC and violations of record-keeping and conflict-of-interest provisions governing NRSROs." The SEC alleged that among other violations EJR "allowed two analysts to participate in determining the credit ratings for issuers whose securities they owned", and "EJR also failed to make or retain a record of the procedures and methodologies it used to determine credit ratings".
Egan-Jones response
Egan has stated, "Our job is to get back to work and focus on providing timely, accurate ratings and research. This will not have any effect on the firm's independence or our commitment to call credit quality as we see it, regardless of issuer." Alan Futerfas, the firm's lawyer, has denied the allegations stating that "it’s clear the SEC has a bias against independent firms" noting that the SEC was using "hyper-technical" claims and that "these filings, new forms started in 2007, are subject to significant interpretation," and that "the firm used good faith and answered as best as it could." Futerfas noted that "not one word in the questions the quality, integrity and timeliness of the Egan-Jones ratings" and criticized the SEC for failing to take action against major NSROs which had "inflated their structured debt, rated junk AAA, and brought down the American economy, according to Congressional reports." The SEC has not responded to Futerfas's remarks.
Settlement
On Jan. 22, 2013 the SEC announced that Egan-Jones has agreed to settle charges that they made willful and material misstatements and omissions when registering to become a NRSRO for asset-backed and government securities. Under the terms of the agreement, the firm is barred from rating government and asset-backed securities as a NRSRO for at least 18 months.
