Justice Department officials in recent months have quietly met with multiple former executives of Moody’s Investors Service to discuss ratings of complex securities before the crisis, according to people familiar with the situation.

The Justice Department lawyers probing Moody’s are still in the early stages of their investigation, according to people familiar with the matter. It isn’t yet clear whether it will result in a lawsuit, the people said.

A Moody’s spokesman declined to comment.

In the recent wave of meetings, Justice Department officials, citing internal company emails, have pressed former Moody’s executives on whether the firm compromised standards to win business, according to people familiar with the matter. The main focus, as with the S&P case, has been on residential-mortgage deals from around 2004 to 2007, the people said.

Moody’s, a division of Moody’s Corp., and S&P, a unit of McGraw Hill Financial Inc., gave triple-A ratings to those mortgage deals, making it possible for even conservative investors to buy securities backed by subprime loans that later turned out to be risky. When the housing market collapsed, losses on those bonds spread everywhere and deepened the crisis, costing investors billions of dollars.

The Justice Department began looking into Moody’s as far back as 2010, the people said. But government lawyers held off on a Moody’s case as they pursued a lawsuit against S&P that eventually was filed in February 2013.

At the time, state and federal law-enforcement officials said they weren’t necessarily stopping with S&P, and were weighing potential action against Moody’s, too. Nearly two years later, the S&P case is close to wrapping up. An announcement of a more than $1.37 billion settlement among S&P, the Justice Department and more than a dozen states could come early this week, according to people familiar with the matter.

Based in New York, and the world’s second-biggest ratings firm behind S&P, Moody’s was a major issuer of triple-A ratings on residential mortgage-backed securities before the crisis.

On top of the Justice Department’s probe, the attorneys general from Connecticut and Mississippi also have lawsuits pending against Moody’s but they put their cases on hold while pursuing S&P. After the S&P lawsuit is resolved, Connecticut plans to again pursue the Moody’s case, according to a spokeswoman for George Jepsen, Connecticut’s attorney general. A spokeswoman for Mississippi Attorney General Jim Hood didn’t respond to request for comment.

Moody’s had “inadequate models and methodology” to gauge the risk of subprime mortgages and exhibited a “relentless drive” to win market share, said Phil Angelides , the former California state treasurer who led the bipartisan Financial Crisis Inquiry Commission, which included a case study of Moody’s in its 2011 report.

“What we found at Moody’s was very similar to the practices and conduct at Standard & Poor’s. The conduct and results were the same,” said Mr. Angelides. The 10-member commission concluded that credit-rating firms were “essential cogs in the wheel of financial destruction.”

In contrast with big Wall Street banks that have paid more than $100 billion to settle postcrisis lawsuits, credit-rating firms have mostly escaped the surge of legal scrutiny and regulatory changes.

But in the past year, the Securities and Exchange Commission approved new rules overseeing that industry. The SEC’s enforcement division, along with two states, won a $77 million settlement against S&P over postcrisis grades of commercial real estate and compliance issues. The Justice Department’s settlement with S&P would be the largest ever brought against a ratings firm.

Former Moody’s executives say the company adopted tighter controls and stricter guidelines around internal communication after previous run-ins with government investigators.

There was a 2001 settlement with the Justice Department’s Antitrust Division over the destruction of documents, amid a civil inquiry by the agency, leading to Moody’s pleading to one count of obstruction of justice and paying a fine of $195,000. Four years later, then-New York Attorney General Eliot Spitzer investigated Moody’s ratings on some mortgage-backed deals, former employees say.

Government lawyers targeted S&P nearly two years ago in a $5 billion fraud lawsuit. S&P had left a paper trail of emails and other internal communication, including a 2007 exchange involving S&P employees where one said a mortgage-bond deal “could be structured by cows and we would rate it.”

In the recent investigation, the Justice Department took aim at S&P despite ratings at Moody’s and Fitch “that were not dissimilar to S&P’s on many of the securities which defaulted in the 2009-2010 period,” Peter Appert, an analyst with Piper Jaffray & Co., said Thursday in a note to investors.

That could stem from ratings model errors specific to S&P or be because Moody’s or Fitch wrote fewer “incriminating” emails, Mr. Appert said.

But an S&P settlement “could embolden the [Justice Department] to institute suits seeking similar payments” from Moody’s and Fitch, he said.

(Published by Wall Street Journal - February 1, 2015)