Risk Update

Business Risk Misc — Client Selection Criteria Changes, Credit-rating Firm Conflict Called

Posted Dan Bressler

“Firm splits with lawyers who won gun rights case at Supreme Court” —

  • “Two of the lawyers responsible for a major victory for gun rights forces at the Supreme Court on Thursday are parting with their prominent law firm after it announced it would no longer handle Second Amendment litigation.”
  • “Former Solicitor General Paul Clement and Erin Murphy, a regular Supreme Court litigator, said they were launching their own firm after Chicago-based Kirkland & Ellis decided to step back from gun-related litigation.”
  • “Through a firm spokesperson, Kirkland confirmed its decision but did not explain its rationale for dropping gun cases. A key attorney at Kirkland, Jon Ballis, said he hoped the firm could continue to work with Clement and Murphy on matters not related to guns.”
  • “Clement’s departure from Kirkland & Ellis echoes a similar episode about a decade ago when he left Atlanta-based King & Spalding after that firm moved to distance itself from Clement’s work to preserve the Defense of Marriage Act, a federal law banning benefits for same-sex couples.”

Not a law firm, but still and interesting conflicts story: “SEC charges Egan-Jones and CEO with conflict of interest breaches” —

  • “The Securities and Exchange Commission on Tuesday has charged credit ratings firm Egan-Jones as well as its CEO, Sean Egan, with violating conflict of interest provisions, according to a release.”
  • “The Pennsylvania-based company, without admitting or denying the SEC’s findings, will settle the charges with a penalty of $1.7M and over $146K in disgorgement and interest, the securities agency said.”
  • “The SEC’s findings concluded that Egan ‘was influenced by sales and marketing considerations while participating in determining a credit rating for that client, which created a prohibited conflict of interest.'”
  • “Also, Egan-Jones didn’t ‘establish, maintain, and enforce policies and procedures reasonably designed to manage such conflicts of interest,’ the SEC said.”

More from the SEC order:

  • “On July 11, 2019, Client A engaged EJR to issue a rating for a real estate transaction. Although EJR’s typical turnaround time for that type of rating was approximately five days, on July 23, EJR discovered that the client relationship manager for Client A had failed to submit the ratings request to the ratings group.”
  • “On July 31, Client A emailed EJR’s client relationship manager to ask about the status of the rating and the reason for the delay. In those emails to EJR, Client A complained that the delay was “beyond ridiculous” and demanded that the rating be issued that day by 5:00 p.m. Client A also threatened to cancel the pending rating request and stop doing business with EJR.”
  • “Egan — who at the time was EJR’s president and the head of EJR’s ratings group — spoke to the client relationship manager and stated that Client A was an important client for EJR and that he was concerned that EJR could lose Client A’s business.”
  • “Later on July 31, Egan called Client A and promised that EJR would provide the requested rating later that day. Egan also told Client A that the client relationship manager was being replaced.”
  • “At around 4:30 p.m. on July 31, a half hour before Client A’s deadline, EJR convened an RRC by telephone to vote on a proposed rating for Client A. Egan and a senior EJR analyst (“Analyst 1”) were the voting members of the committee, with Analyst 1 serving as the chairperson. The presenting analyst on the committee (the “Presenting Analyst”) recommended a rating of BBB+ for the transaction. However, during the RRC meeting, Analyst 1 requested certain information about the transaction that she believed was essential for determining an accurate rating. Because EJR did not have the information that she sought, Analyst 1 abstained from voting on the proposed rating. Without a majority of voting members in support, the proposed rating was not approved by the RRC.”
  • “At approximately 5:13 p.m., Client A sent Egan an email stating: ‘We are passed [sic] 5pm. Where is the rating?'”
  • “At approximately 5:17 p.m., Egan became the chairperson of the RRC. Analyst 1 was replaced with another EJR analyst (“Analyst 2”) as the second voting member.”
  • “At 5:21 p.m., Egan and Analyst 2 voted to approve the proposed BBB+ rating, which EJR then issued”
  • “Client A, however, was displeased with the BBB+ rating, and emailed the Presenting Analyst asking why the rating only was BBB+ and noted that EJR had recently rated another, similar transaction for Client A two notches higher. When the Presenting Analyst attempted to explain the reason for the BBB+ rating, Client A replied, ‘Surely you jest. I recommend you go back and verify your models. You must have missed something.’ Client A then forwarded those emails to Egan and asked Egan to call to discuss the rating.”
  • “On August 6 and August 7, 2019, Client A emailed Egan asking him whether there was any ‘update’ on the rating.”
  • “Around this time, Egan, in his capacity as a member of the prior RRC that had approved the BBB+ rating on July 31, directed the Presenting Analyst to develop a new rating tool in light of Client A’s concerns about the BBB+ rating. On August 12, EJR convened another RRC, with Egan as a voting member and an analyst who had not participated in either of the two prior RRCs as the RRC chair and second voting member (“Analyst 3”). Neither Analyst 1 nor Analyst 2 was invited to serve on this new RRC.”
  • “The Presenting Analyst again proposed a rating of BBB+. Notwithstanding the Presenting Analyst’s recommendation, and although EJR had received no substantive information from Client A to support a higher rating, Egan and Analyst 3, relying on the new rating tool referenced above, voted to increase the rating one notch to A-.”