In a lawsuit filed in federal court in Manhattan, the Teamsters Local 282 Pension Trust Fund alleged the New York company's ratings of bonds backed by subprime mortgages - including bonds packaged as collateralized debt obligations - were materially misleading to investors concerning the quality and relative risk of those investments.
"Moreover, even as a downturn in the housing market caused rising delinquencies of the subprime mortgages underlying such bonds, Moody's maintained its excessively high ratings, rather than downgrade the bonds to reflect the true risk of owning subprime-mortgage-backed debt instruments," the lawsuit says.
The lawsuit is seeking class-action status for all purchasers of Moody's shares from Oct. 25, 2006, to July 10, 2007.
On July 11, Moody's announced it was downgrading 399 mortgage-backed securities issued in 2006 and reviewing an additional 32 for downgrades, representing about $5.2 billion of bonds, according to the lawsuit. The company also disclosed it had downgraded 52 bonds issued in 2005, according to the complaint. Moody's stock price traded below $45 a share in August after the disclosures - down from above $60 a share in July and $70 a share in June, according to the lawsuit.
Shares of Moody's rose $1.32, or 2.9 percent, to $47.39 Wednesday.
Linda S. Huber, the company's chief financial officer, also is named as a defendant in the case.
A Moody's spokesman didn't immediately return a phone call seeking comment late Wednesday.
Earlier Wednesday, Securities and Exchange Commission Chairman Christopher Cox told a Senate committee that the regulator was probing whether credit-rating agencies, including Moody's and Standard & Poor's followed proper procedures in rating mortgage-backed securities.
Critics claim that rating agencies such as Moody's and Standard & Poor's profited from the explosion of subprime mortgages because Wall Street investment banks paid them to rate the likelihood of default in mortgage-backed securities. If Wall Street firms didn't get the ratings they wanted, they allegedly shopped around at other ratings agencies.
"What we saw in the mortgage market reminds me of what you see in developing countries, it's what you see in Bolivia," said Peter Morici, a business professor at the University of Maryland's Robert H. Smith School of Business. "Unfortunately, it's what has become accepted practice on Wall Street."
Mercury News Staff Writer Mark Schwanhausser contributed to this report.