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* Moody's was accused of inflating mortgage ratings
* Judge calls decision against whistleblower "harsh result"
By Jonathan Stempel
NEW YORK, March 2 (Reuters) - A federal judge on Thursday dismissed a whistleblower lawsuit by a former Moody's Investors Service managing director and said he deserves none of the $863.8 million that Moody's agreed to pay to settle claims it inflated mortgage ratings prior to the 2008 financial crisis.
U.S. District Judge William Pauley said Ilya Eric Kolchinsky could not show that the Moody's Corp unit violated the federal False Claims Act, given how the government kept paying for its ratings even after learning they might be compromised.
The Manhattan judge said this barred Kolchinsky from sharing in Moody's Jan 13 settlement with the U.S. Department of Justice and the attorneys general of 21 states and the District of Columbia, though the terms left open that prospect.
"This court acknowledges that this a harsh result," Pauley wrote. "Kolchinsky provided enormously helpful information to various congressional committees and government investigators."
Stephen Weiss, a lawyer for Kolchinsky, did not immediately respond to requests for comment.
Moody's said: "We are pleased that the court has dismissed the case in its entirety."
Kolchinsky accused Moody's of issuing bogus ratings for mortgage securities, credit default swaps and collateralized debt obligations in a push to win more fees.
Moody's has received wide criticism for such practices, as have its main rivals Standard & Poor's and Fitch.
In its settlement, Moody's acknowledged it did not follow its own rating standards, though the New York-based company did not admit liability.
The accord resolved claims under the federal Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA, and various state laws.
Pauley nonetheless concluded that even if the claims did "overlap" Kolchinsky's, he could not financially benefit.
"This court is particularly sympathetic to Kolchinsky's position in light of the serious and far-reaching effects that Moody's conduct had on the American economy," Pauley wrote.
"This observation does not, however, cure the deficiencies in Kolchinsky's pleadings or enable him to collect a share of the FIRREA settlement."
The government decided in 2014 not to join Kolchinsky's lawsuit, leaving him to pursue it on his own.
S&P, part of S&P Global Inc, reached its own $1.375 billion settlement with federal and state authorities in 2015 to settle similar allegations.
Pauley dismissed an earlier version of Kolchinsky's lawsuit in February 2016. Thursday's dismissal was "with prejudice," meaning the case cannot be brought again.
The case is U.S. ex rel Kolchinsky v Moody's Corp et al, U.S. District Court, Southern District of New York, No. 12-01399. (Reporting by Jonathan Stempel in New York; Editing by Cynthia Osterman)