Judge Says Ratings Agencies Are Not Necessarily Protected By Free Speech

from the that-seems-bad dept

The big ratings agencies, Moody's and S&P have taken something of a beating for their role in the financial crisis -- often rating pure junk as if it were pure gold. But, of course, in the rush to find someone to blame legally, it made little sense to go after the ratings agencies. The real problem wasn't that the ratings sucked (they did), but that federal regulations gave those ratings power in the law. This made those ratings not only more important, but gave them an official "stamp of approval" such that people assumed (incorrectly, obviously) that they must be accurate. The idea that a small group of guys sitting in an office could more accurately rate the risk of debt over the actual market seems rather absurd -- and yet, we gave it the federal stamp of approval. Still, as bad as the ratings were, there shouldn't be any legal consequence for getting the ratings wrong. After all, unless there was evidence of outright fraud, the ratings are simply opinions, which are protected by the First Amendment... or so we thought.

In a ruling last week, a judge has noted that ratings agencies' ratings are not protected free speech if they're only disseminated to a small group of people, rather than the wider public. While the ruling cites a few earlier cases, I have to admit that I have trouble understanding this reasoning. I don't recall anything in the First Amendment that says the government can restrict freedom of expression if it's to a small group of people, but not if it's to a large group of people. This probably isn't a huge deal for the ratings agencies -- though, it will keep them busy with some lawsuits that may cost them some money. The bigger "problem" in the market came from relying on their public ratings -- and those should (still) be protected.
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Filed Under: free speech, ratings agencies, wall street
Companies: moody's, s&p


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  1. identicon
    Periphera, 9 Sep 2009 @ 6:45am

    Drawing the line

    Opinions are *always* protected speech? What about my doctor's opinion that I don't have cancer?

    I haven't read the decision, but it seems to me there's a long tradition in opinions creating liability when they are produced as a matter of commerce. That seems like the line the judge was trying to draw - this isn't like a general rating, it's produced for a specific audience. Ebert's public review of your movie is a non-actionable opinion, but if you paid him to screen it in advance and give you his feedback, that's different. There should be a high bar to proving gross negligence or dereliction here, but it should be possible to bring the case.

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