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 @ 2:03pm

    Re: Re:

    But that's just it -- there's an allegation of outright fraud here. Because of the procedural posture (a motion to dismiss), the judge was being asked to dismiss the claims against the ratings agencies outright -- before even considering evidence of fraud, deception, etc. -- because the ratings agencies claimed their "opinions" were protected by the First Amendment. The judge refused to dismiss the claims, holding the First Amendment wasn't an absolute bar to the case moving forward. Now, as the case moves forward, the parties can introduce evidence, and we can see if you and I -- and more importantly, the court -- think that evidence demonstrates "outright fraud."

    The alternative would have been for the court to dismiss the claim without ever considering whatever evidence there may be to support the fraud claim. I would have found that result even more troubling, and I would have thought you would agree (which is why I was puzzled by your original post).

    As for why telling something to a small group, versus telling the general public, should (or did) make a difference to the court, that distinction relates to a line of First Amendment case law in the 60s and 70s in which the Supreme Court held that where defamatory speech relates to public officials, or even to private person on matters of public concern, that the First Amendment requires government to meet a higher standard before imposing liability for such speech. (By comparison, common law on defamation allowed a person to be found liable for defamatory statements even if they had no idea the statement was false, and hadn't even acted negligently.) The court noted an earlier case in which a claim against ratings agencies, based on the ratings they published, had been dismissed on First Amendment grounds, but seemed to find the current case more analogous to other cases involving things like false statements made by credit rating agencies in credit reports circulated to a small group, in which courts had found the subject of the false statements was not a matter of "public concern" and thus the heightened First Amendment standard did not apply.

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