Moody's meltdown (Updated: S&P comments)

Look who's sitting out the eurobailout party: the widely despised credit rating agencies Moody's and Standard & Poor's.

Moody's shares tumble

New York-based Moody's (MCO) disclosed Friday it could soon face a Securities and Exchange Commission enforcement action over some paperwork it filed with regulators three years ago.

Moody's got a Wells notice in March saying the SEC staff will recommend that the commission pursue a case against the company over its registration statement under the Credit Rating Agency Reform Act of 2006.

The registration laid out how Moody's determines ratings, the company said in its quarterly filing with regulators. But the SEC staff says Moody's comments "were rendered false and misleading" by a subsequent admission that company policy was violated.

Moody's said it disagrees with the SEC staff and "believes an enforcement action is unwarranted." But the prospect of SEC action is only the latest strike against the rating agencies, which have been roundly criticized for playing a major role in the credit crisis yet have so far escaped any serious repercussions.

The European Central Bank last week took the unusual step of ignoring the rating agencies in an earlier attempt to bring the Greek crisis under control. Bill Gross, the Pimco bond manager who has long been critical of the agencies' rubber-stamp backing of risky subprime-related securities, lashed out again, saying the agencies had swooned during the housing bubble at the sight of subprime "hooker heels."

Moody's shares tumbled 11% in early trading to a level last seen in October.  McGraw-Hill (MHP) – the parent of Standard & Poor's – didn't disclose a Wells notice in its quarterly filing last month, but its shares dropped 8%.

Update 2:17: S&P's parent, McGraw-Hill, "did not receive a Wells notice," spokesman Jason Feuchtwanger says. He says McGraw-Hill Chairman Harold McGraw III made the remarks today at Jefferies' Sixth Annual Global Internet, Media and Telecom Conference.