A bug in Moody's computer model had caused the agency to wrongly award around $1 billion worth of debt a triple-A rating - meaning the debt notes appeared to offer high returns and low risk to investors.
When the error was discovered in early 2007, the computer bug was fixed but the ratings remained the same as an internal committee decided a change could hurt the company's reputation, reports the Financial Times.
As the debt notes were issued in Europe, the SEC has dropped the case because of "uncertainty" about its remit in pursuing the action in the US.
Last month, the SEC pledged to follow up its recent $550 million settlement with Goldman Sachs over the bank selling mortgage-backed securities allegedly designed to fail by bringing more high-profile cases against Wall Street firms.
Robert Khuzami, SEC director of enforcement, told the Financial Times: "Financial institutions look at cases like Goldman and review their own practices and risk-tolerance and think about how risky behavior affects their brand."
By Gary Cooper