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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
    Paul Product, 9 Sep 2009 @ 8:20am

    Mike, you seem flabbergasted that a judge found that the First Amendment doesn't necessarily bar legal action against a company for its actions, where those actions involve some sort of "speech." I think of myself as a bit of a 1A absolutist at times, so I'm with you on a strong reading of the 1A. But I'm baffled by your bafflement. *Lots* of things that might be characterized as speech, or expression, or even "opinion" can nevertheless give rise to legal liability. There's the old cliche about shouting "fire" in a crowded moviehouse, but there also things like fraud, which virtually always (by definition) involves some sort of misleading or deceptive expression, and yet isn't protected by the First Amendment. Libel is another case where the 1A doesn't bar liability for false statements. (Yes, the fact that an otherwise-libelous statement is an opinion takes it out of the realm of libel, but the line between "opinion" and "factual assertion" is hardly a bright one.) There are more specific cases where deceptive or bad faith statements are likewise unprotected, e.g. perjury or other types of false statements to various government authorities in certain contexts. There are also contexts where statements/expression that might be characterized as "opinion" also give rise to legal liability, based on the relationship between the speaker and the listener. As Periphera suggests above, a doctor's opinion can give rise to legal liability, even though the First Amendment would generally protect the right of doctors to speak, and for anyone to give an opinion on someone else's health.

    All of which is not to say that the court's decision is the appropriate one. But it sounds like you're suggesting that the question ought to be easy -- the ratings agencies say they were offering opinions, and thus the First Amendment categorically bars them from being held liable for those statements. That would be a broad, an overly simplistic, reading of the First Amendement -- one that I don't think you'd endorse in other contexts.

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