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Ilya Eric Kolchinsky v. Moody's Corporation

February 28, 2012


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:




Plaintiff Ilya Eric Kolchinsky ("Kolchinsky") filed his Second Amended Complaint on May 9, 2011, pursuant to this Court's order of April 14, 2011 granting leave to amend. Kolchinsky reasserts his previous claims for defamation, tortious interference, intentional infliction of emotional distress, and declaratory relief against his former employer, Moody's Corporation and Moody's Investors Service, Inc. ("Moody's"), and Moody's Chairman and CEO, Raymond McDaniel (collectively, "Defendants"). The Second Amended Complaint adds a claim for violation of the anti-retaliation provision of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A.*fn1 Defendants' Fed.R.Civ.P. 12(b)(6) motions to dismiss the Second Amended Complaint were fully briefed as of July 15, 2011.*fn2 For the reasons discussed below, Defendants' motions to dismiss the defamation, tortious interference, intentional infliction of emotional distress, and declaratory relief claims of the Second Amended Complaint are granted and the motion to dismiss the Sarbanes-Oxley claim is denied.


In September 2007, Kolchinsky was Managing Director of the Derivatives Group at Moody's,*fn3 where he oversaw the domestic Asset Backed Securities Collateralized Debt Obligation ("ABS CDO") product line. (Second Am. Compl. ¶ 28.) On September 10, 2007, Kolchinsky learned that Moody's was about to rate ABS CDOs using old rating methodologies. Kolchinsky believed that by using these methodologies, Moody's would knowingly be violating the federal securities laws and SEC rules. (Id. ¶¶ 29-33.) He reported these concerns to his direct supervisor, and advised that Moody's should stop rating ABS CDOs until new methodologies were imposed. His supervisor was "non-responsive." (Id. ¶¶ 31-32, 34.) Kolchinsky then escalated his concerns to Moody's Head of Credit Policy, and on September 21, 2007, a press release was issued establishing new methods for rating the securities. (Id. ¶¶ 35-36.)

A. Alleged Retaliatory Action

Kolchinsky alleges that shortly after September 2007, Moody's took adverse employment actions against him. He alleges that Moody's, among other things: prevented him from participating in departmental meetings; removed him from the Derivatives Group; decreased his responsibilities and those of his staff; and lowered his base salary and target bonus. (Id. ¶ 38.) Kolchinsky contends that these actions were in retaliation for his intervention to prevent what he believed were violations of the securities laws. (Id. ¶ 37.)

A year later, on September 12, 2008, Kolchinsky filed a retaliation complaint with Michael Kanef, Chief Regulatory and Compliance Officer for Moody's Investor Service. (Id. ¶ 40.) Kanef investigated Kolchinsky's allegations, but Kanef had conflicts of interest since he

oversaw the group that rated residential mortgage-backed securities and was involved in setting Moody's ratings policies for those securities. (Id. ¶¶ 42-43.) During a follow-up meeting with Kanef on December 3, 2008, Kanef stated that Moody's retained the law firm of Sullivan & Cromwell LLP ("Sullivan & Cromwell") in connection with Kolchinsky's retaliation complaint and the concerns he raised in September 2007. (Id. ¶ 44(b).) Kolchinksy alleges that Sullivan & Cromwell asked him to report any potential violations of the law and Moody's policies that he was or became aware of. (Id. ¶ 45.)

In October 2008, Kolchinsky was asked by Moody's Credit Policy Group to give an opinion on a new credit rating methodology being promoted by the Derivatives Group for rating ABS CDOs. (Id. ¶ 47.) Kolchinsky concluded that the proposed methodology was "irresponsible," and he conveyed his objections in various emails to the credit policy team. (Id. ¶ 48.) Kolchinsky alleges that as a result of these emails, Moody's retaliated against him further by transferring him to a "support" role without any revenue responsibilities or opportunity for future promotion. (Id. ¶ 50.)

Kolchinsky raised additional red flags in 2009 about what he believed were potential violations of the securities laws at Moody's. On January 9, 10, and 13, 2009, Kolchinsky emailed Kanef (the "January Emails") expressing concerns similar to those he raised in October 2008. (Id. ¶ 52.) Then, in May 2009, Kolchinksy noticed a press release for a transaction called Nine Grade Funding II ("NGFII"), which was being placed for watch on downgrade, shortly after it was rated. (Id. ¶ 54.) Kolchinsky believed that this sudden downgrading indicated that the initial rating of NGFII was likely problematic. (Id.) Kolchinksy alleges that he inquired and learned that when the Derivatives Group rated NGFII, it used an old methodology that it knew was incorrect. When the Derivatives Group subsequently made a new rating methodology public, the change effectively downgraded the ratings of a group of securities, including NGFII. (Id. ¶ 55.) Kolchinsky believed that Moody's actions in connection with NGFII violated the federal securities laws and SEC rules, and in July 2009, he sent Kanef a memorandum expressing his concerns (the "NGFII Memo").*fn4 (Id. ¶¶ 57-58.)

In August 2009, Moody's retained the law firm of Kramer Levin Naftalis & Frankel LLP ("Kramer Levin") to investigate Kolchinsky's claims in the NGFII Memo in order to terminate him and "white-wash" the company's alleged fraud. (Id. ¶¶ 60-61.) Nonetheless, Kolchinsky agreed to cooperate with this investigation and meet with Kramer Levin on September 2, 2009, but only if the law firm provided a detailed meeting agenda for Kolchinsky to review with his own counsel prior to the meeting. (Id. ¶ 63.) Kolchinksy alleges that Kramer Levin refused to provide this agenda, and the meeting was postponed. (Id. ¶ 65.)

On September 3, 2009, the day after the meeting was to take place, Kolchinsky met with a human resources manager and an assistant general counsel for Moody's. Kolchinsky alleges that he was given "an ultimatum of either speaking with a Kramer Levin attorney immediately or being suspended." (Id. ¶ 66.) In response, Kolchinsky stated that he was represented by an attorney and wanted her involved in the meeting with Kramer Levin. (Id.) He was suspended by Moody's the same day. Kolchinsky contends that this suspension was a constructive termination because Moody's removed his name from the external directory; listed him as "inactive" in the internal directory; told him that he would not be doing any work for, or on behalf of, Moody's; and ordered Kolchinsky to return company computers, cell phones, and identification cards. (Id. ¶¶ 67, 157.) According to Kolchinsky, Moody's took these measures in retaliation "for failing to cooperate with the so-called 'independent investigation' ...

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