Moody's Investors Service has ousted the head of a key division and pledged to discipline other staff after an investigation concluded that staff at the credit agency knowingly rated about $1 billion of securities incorrectly.

Noel Kirnon will leave his position as head of the structured finance division, which rates complex securities made up of pools of assets such as bonds, on July 31.

His position will be filled by Andrew Kimball, Moody's chief credit officer, until a permanent replacement can be found.

Mr Kirnon's departure was announced after reports in May about the rating of complex derivatives, known as constant proportion debt obligations (CPDOs), prompted one company to launch an investigation into its processes.

The inquiry concluded that about $1 billion of CPDOs were wrongly given the top AAA credit rating, four notches higher than the AA that they merited, because of a computer error.

When some senior staff became aware of the mistake early in 2007, they chose to change the rating methodology to mask the error, rather than assigning a lower rating, the investigation found.

The report's conclusion is particularly embarrassing for Moody's because the agency, like its key rivals Standard & Poor's and Fitch, is already under fire for assigning the top rating to many so-called collateralised debt obligations (CDOs), or pools of bonds, that subsequently have plummeted in value.

Raymond McDaniel, Moody's chairman and chief executive, said: “I am deeply disappointed by the conduct that occurred in this incident. In response, we are taking immediate and appropriate action to address the lapse in our rating process and to ensure that a similar event does not occur again.”

Moody's emphasised that it was the employees, not the company's practices, that were to blame.

The findings of the review, conducted by Sullivan & Cromwell, the law firm, come as American and European regulators work to tighten the rules that govern the ratings of various securities.

Barney Frank, a US congressman, has demanded tougher regulation and has accused the ratings agencies of misleading investors by providing top rankings on sub-prime- related securities that lost as much as 80 per cent of their value.

What is a CPDO?

— Constant proportion debt obligations (CPDOs) are complex debt instruments invented in 2006

— They are based on investment-grade credit derivatives, most of them using indices such as the iTraxx Europe and the CDX 125. They promise to pay high returns and typically have ten-year maturities

— The owner of a CPDO essentially buys a stake in a highly leveraged pool of credit derivative investments

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