Moody's Must Defend Against Whistleblower's Claim For Unlawfull Termination

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By Order dated February 27, 2012, United States District Court Judge Paul A. Crotty denied Moody’s Corporation’s, Moody’s Investor Service, Inc.’s (referred to collectively herein as “Moody’s”) and Raymond McDaniel’s motion to dismiss the claim of retaliatory discharge by whistleblower, Ilya Eric Kolchinsky.

Ilya Eric Kolchinsky v. Moody’s Corporation, Moody’s Investor Service, Inc.
and Raymond McDaniel
United States District Court for the Southern District of New York
Civil Action No.: 10 CV 6840 (PAC)

Moody's Must Defend Against Whistleblower's Claim For Unlawfull Termination

By Order dated February 27, 2012, United States District Court Judge Paul A. Crotty denied Moody’s Corporation’s, Moody’s Investor Service, Inc.’s (referred to collectively herein as “Moody’s”) and Raymond McDaniel’s motion to dismiss the claim of retaliatory discharge by whistleblower, Ilya Eric Kolchinsky. See Decision dated February 27, 2012, United States District Court for the Southern District of New York, 10 cv 6840 (PAC).

In his complaint, Mr. Kolchinsky, a former Managing Director of Moody’s, alleged three separate acts of whistleblowing involving Moody’s ratings of ABS-CDOs, the products that were responsible for hundreds of billions of dollars of losses at financial institutions, and three corresponding acts of retaliation. Mr. Kolchinsky asserts that he was constructively terminated from his employment in 2009, after he reported that: 1) Moody’s was filing false reports, and 2) Moody’s actions in connection with its ratings were in violation of the rules and regulations of the Securities and Exchange Commission, and/or federal law relating to fraud against shareholders.

Section 1514A of the Sarbanes-Oxley “Whistle Blower” statute makes it unlawful for certain employers to “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms or conditions of employment because of any lawful act done by the employee . . . to provide information . . . or otherwise assist in an investigation regarding any conduct the employee reasonably believes constitutes a violation” of certain, enumerated federal laws. 18 U.S.C. § 1514A.

Judge Crotty held that “a plaintiff need not allege termination to state a claim under Section 1514A.” Instead, it is sufficient to show that a plaintiff suffered “a materially adverse change” in his employment status, such as “a decrease in wage or salary, a less distinguished title, a material loss of benefits, significantly diminished material responsibility, or other indices.” (Internal citations omitted.) Accordingly, the Court held that Mr. Kolchinsky “sufficiently alleged that Moody’s took ‘unfavorable personnel action’ against him after he reported what he believed were potential violations of the federal securities laws and SEC rules.”

The Court’s decision reaffirms the rights of financial analysts, under the Sarbanes-Oxley Act, to fulfill their responsibilities to shareholders and investors, free from the threat of retaliation by senior management. The decision is especially important, given Congress’s findings of “breakdowns at Moody’s”, and its conclusion that the financial crisis of 2008 “could not have happened without the ratings agencies.” Staff of Nat’l Comm’n on the Causes of the Financial and Economic Crisis in the U.S., Final Report (2011) at xxv.

The Court dismissed Mr. Kolchinsky’s defamation and other related claims.

Mr. Kolchinsky is represented by Joshua H. Reisman of Reisman Sorokac in Las Vegas, Nevada, and Todd J. Krouner and Diana M. Carlino of the Law Office of Todd J. Krouner in Chappaqua, New York.

A copy of Judge Crotty’s decision is available at http://www.krounerlaw.com. For further information, please contact Joshua H. Reisman at (702) 727-6258, or Todd J. Krouner at (914) 238-5800.

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Julia Gallo
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