Ratings Agencies Lose Free-Speech Claim

Sep 2009 // American Public Media

Ratings agencies lose free-speech claim


Kai Ryssdal: From health care to finance now. The ratings agencies have been on the receiving end of much criticism for their role in fostering the credit crisis. Giving triple A ratings to B-grade bonds. Those companies, Moody’s and Standard and Poors specifically, have long used the First Amendment as a defense against lawsuits. That they’ve got a constitutional right to say what they want, even if it costs people money. This week a federal judge threw out that defense, which means a lawsuit claiming they intentionally inflated their ratings on risky mortgages can indeed proceed. Here’s our senior business correspondent Bob Moon.

BOB MOON: The First Amendment has never been an absolute defense. So says Yale law professor Jonathan Macey, who points out it’s not OK to yell “Fire!” in a packed theater.

JONATHAN MACEY: They’ve been saying there’s no fire in the crowded theater that’s our financial markets, when there has been a fire and taking money for saying that there’s no fire.

Until now, Macey says the free-speech defense has left victims with no way out.

MACEY: We get to say whatever we want, but unless we were knowingly lying — unless you can prove we were knowingly lying — you don’t get to have your day in court with us.

Now, securities law attorney Tom Ajamie says it’ll be up to the investors to prove fraud — not just that the ratings turned out to be wrong, but that the agencies knew it to begin with.

TOM AJAMIE: It’s a very high burden, but one way to show that may be internal memos, where they said among themselves, ‘These are risky,’ but then went ahead and gave very high, safe ratings.

This ruling applies only to cases in which ratings are specifically offered to a select group of investors. But Yale’s Jonathan Macey argues that not extending it to everyone now wouldn’t be fair.

MACEY: Big, sort of institutional investor fat cats get to sue credit rating agencies because they’re the ones who purchase in these elite private placements, whereas the great unwashed don’t get to sue because they don’t get to participate in these private placements. Uh, I think that is wacky.

We placed a call to Floyd Abrams, who represents Standard & Poor’s and is a leading attorney on First Amendment issues. He did not call back by airtime.

I’m Bob Moon for Marketplace.