Judge Says Ratings Agencies Are Not Necessarily Protected By Free Speech

from the that-seems-bad dept

Tue, Sep 8th 2009 6:44pm — Mike Masnick

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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Anonymous Coward, 8 Sep 2009 @ 7:06pm

"ratings agencies' ratings are not protected free speech if they're only disseminated to a small group of people, rather than the wider public."

So if I talk to a friend privately it's not protected by free speech but if I talk to him/her publicly it is? So if a friend asks me what I think of, say, some product I don't like I must publicly tell everyone in order for it to be protected by free speech, if I tell the friend alone then I'm not protected?
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DCX2, 8 Sep 2009 @ 8:58pm

Allow me to fill in the blanks...
Okay, so, Morgan Stanley, Moody's, and S&P all get together and iteratively refined a package until it gets a certain rating. Moody's and S&P are paid handsomely by Morgan Stanley (3x normal fees + ongoing fees), but only if the SIV in question got the requested ratings... (see page 11 of the judge's opinion)

The thing tanks. The senior debt, the best of what was in the package, is worthless. The investors smell something fishy...certainly the ratings agencies knew it was made up of crap.

Sure, the rating agencies are just giving o.p.i.n.i.o.n.s... Don't mind the fact that their privileged federal status makes their opinions very valuable, they're still just opinions. (something about...having your cake and eating it too?)

So maybe you're a stickler for details. Well, then you might start with the judge's citation for previous litigation where the credit rating agencies' "opinions" weren't protected free speech. Stare decisis, and all that.

Oh, and there's some jazz about "actual malice" and "actionable opinions" and how they can only get in trouble if they provided opinions in bad faith. I wonder if that has anything to do with one of the headings on page 38 of the opinion, "Knowledge of the Falsity".

http://online.wsj.com/public/resources/documents/ratings.pdf
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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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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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Mike Masnick (profile), 9 Sep 2009 @ 10:28am

Re:
*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.

Which is why I wrote in the post "unless there was evidence of outright fraud."

But the ruling does not discuss that at all. It just says that because the speech was targeted to a small group of people, 1A doesn't apply. I find that troubling.
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Ferin (profile), 9 Sep 2009 @ 10:28am

I'm not sure I get the logic here. I can kinda see allowing the suit if there's evidence that the rating company deliberately mislead the people involved somehow and that lead to them suffering harm. That would make sense to me at least.

But the article seems to say she's only looking at who got the ratings, and I don't understand why that matters.
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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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Mike Masnick (profile), 9 Sep 2009 @ 2:23pm

Re: 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).

Aha. Gotcha. I guess my trouble remains with the "small group" vs. "large group" which you do explain below, but still doesn't make sense to me. I wouldn't have had a problem if the court said "it's too early to throw this out on a 1A claim because we haven't examined if there's fraud yet," but bringing in the whole large/small group question just didn't make sense to me.
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DCX2, 9 Sep 2009 @ 3:52pm

Re: Re:
Which is why I wrote in the post "unless there was evidence of outright fraud."

But the ruling does not discuss that at all.

You should really consider reading the ruling before you make allegations about what is and is not in it before you go hyperventilating about a judge's bad opinion. The ruling specifically discusses the terms "actual malice" and "non-actionable opinions" and whether or not fraud negates a first-amendment defense. They cite several other court opinions, including the one which creates the precedent for handling the small-group/large-group/first amendment problem.

And there is evidence of outright fraud. See page 38, Section V.C.2 - "Knowledge of the Falsity".
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Gene Cavanaugh, 10 Sep 2009 @ 2:50pm

Free Speech
I agree, Mike.

True, if you light a match in a crowded theater, then yell "fire!" you are likely to be liable even though there is free speech here, and even though what you are saying is true; but it appears the judge simply misread the law. I suspect if the cites he/she gave were reviewed, we would find they don't say what he/she thinks they say.
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