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Floyd Abrams, Standard & Poor’s, and the First Amendment Defense of Rating Agencies

Monday, July 20, 2009 2:58 AM - By David Lat

Floyd Abrams Cahill Gordon Reindel.jpgCould the credit rating agencies who are now being sued for their alleged role in the financial meltdown have a valid First Amendment defense? Floyd Abrams, god of First Amendment law and longtime partner at Cahill Gordon & Reindel, thinks so.

Abrams is the subject of a lengthy, interesting article in Sunday’s New York Times, focused on his representation of Standard & Poor’s, the biggest of the rating agencies. From the NYT:

Dozens of investors have filed lawsuits seeking redress from the rating agencies, contending that the companies bear responsibility for investors’ losses, under a Whitman’s sampler of theories. The recession, in other words, is about to begin its litigation phase, and Mr. Abrams and a handful of partners at the law firm of Cahill Gordon & Reindel are readying defenses for more than 30 suits filed against S.& P. Up first, an oral argument on a motion to dismiss one case is set for July 31….

Mr. Abrams will contend that S.& P.’s ratings deserve exactly the sort of free-speech protections afforded to journalists, on the theory that a bond rating is like an editorial — an opinion based on an educated guess about the future. And for the same reason you can’t sue editorial writers, Mr. Abrams will argue that you can’t sue a bond rater because the economy went into a free fall that few saw coming.

Is this a valid comparison? Is trying to sue a ratings agency like trying to sue a newspaper editorial board? Or the weatherman?

Read more, and debate the issue, after the jump.

One possible response to the First Amendment defense:

The First Amendment is no defense against fraud, and that is what is alleged by many of the plaintiffs. Against them, Mr. Abrams will argue that S.& P. was every bit as blindsided as nearly everyone else in the private sector and in the regulatory sphere.

Abrams doesn’t just want to win in court; he also wants to win in the court of public opinion:

“Look, for the client’s interest, I very much hope that we can get rid of these litigations on motions for dismissal,” he says. “But from a personal point of view, I look forward to the chance to defend them against those charges in court. If we have a real trial, people would say terrible things about them and I would be very happy to show that those things aren’t so.”

It takes a moment to realize what Mr. Abrams is saying here: he doesn’t simply want to defend the ratings of S.& P. He wants to rehabilitate their reputation. The word “quixotic” doesn’t seem to capture how quixotic this sounds.

S&P just wants to be loved. Is that so wrong?

Sitting behind a huge desk in a corner office, dressed in a light blue Oxford shirt and a blue tie, [Abrams] seems most comfortable discussing the finer points of law. Even now, in the senior-discount stage of his life, he gives the impression of a man fit enough to put you in a headlock, though he also seems too well mannered for fisticuffs. He answers questions deliberately, like one accustomed to having his words read back in a transcript. As he speaks, he slowly moves his coffee cup from a spot on his desk to a perch on a small stack of Post-it notes, then back to his desk, then back to the Post-its, over and over.

He sounds a bit OCD to us. Of course, many great lawyers are.

[M]edia cases have made him the only First Amendment lawyer whom anyone outside the legal field can name. (He is representing a New York Times reporter who was called before a grand jury, but he’s no longer the paper’s go-to counsel, he says, because his price is too high.)

This may not be surprising, given that the Times doesn’t have a lot of extra cash to be throwing around these days. Still, we’d be curious to know what Floyd’s hourly rate is. Is he a member of the Thousand-Dollar Bar?

Abrams certainly has the experience to justify a stratospheric billing rate. As the Times article notes, he made his name in the celebrated Pentagon Papers case, which went all the way up to the Supreme Court. In the years since, he has been involved in many other landmark litigations in the First Amendment / free speech area — e.g., representing the Brooklyn Museum when Mayor Rudy Giuliani went after them over the elephant poo painting.

Will his work for S&P further burnish his reputation? Or is it a misstep for Abrams to represent S&P — and in such an aggressive manner? The ratings agencies aren’t super-sympathetic:

Like its competitors, S.& P. is paid by the issuers of the bonds it assesses, setting up what appears to be a rather spectacular conflict of interest — like a teacher appraising the work of the students who pay his salary. To detractors, that apparent conflict explains why so many bonds that were later all but worthless were stamped triple-A. It might also explain the now-infamous back and forth of instant messages between two S.& P. analysts, one of whom says the firm’s risk assessment model hasn’t captured half the risk of a particular deal.

“It could be structured by cows,” the analyst wrote, “and we’d rate it.”

That IM exchange is certainly unfortunate. But with respect to teachers grading students who pay their (teachers’) salaries, doesn’t that happen all the time? Teachers in my high school graded the work of students who paid their salaries (or whose parents paid their salaries) all the time; it was no big deal.

“I don’t think [the First Amendment defense of rating agencies is] a good legal argument, though there might be some courts that buy it,” says John C. Coffee, a law professor at Columbia. “I don’t think that a rating is the same as an editorial, because The New York Times’s editorial page isn’t paid for by a sponsor. The direct, commercial relationship of the issuer of the bond and the rating agency puts it into the field of commercial speech.”

Generally, commercial speech isn’t accorded the same high level of protections given to journalists. There are potential legal repercussions, for instance, when a doctor gives a medical opinion that turns out to be wrong, says Rodney A. Smolla, dean of the Washington and Lee University School of Law.

“There’s no question that the rating agencies are entitled to some level of First Amendment protection,” he says. “What’s harder to figure out is what degree of regulation we can impose on the companies. There are millions who rely on the objectivity of those ratings, and if you could prove that those ratings were corrupted by a bribe or tainted by a clear conflict of interest, my view is that those protections would be reduced or eliminated entirely.”

This reminds us of the Wall Street research analysts scandal, investigated by Eliot Spitzer back when he was New York attorney general. Wall Street banks were forced to pay up after conflicts of interest were discovered arising out of overly cozy relationships between research and investment banking.

But there may be an important difference. The research analysts often knew that what they were praising was crap; here, S&P claims that its analysts genuinely believed in their recommendations:

Mr. Abrams maintains that the law protects S.& P. and its judgments about the future as long as analysts at the company truly believe the ratings they come up with. “Even if those ratings are wrong, or the company did a lousy job, you can’t bring a lawsuit against someone for offering forward-looking predictions,” he says.

He returns to the editorial-writer analogy, though he has others. You can’t sue economists, he says, or meteorologists.

But there are some differences between a weather forecaster and an S.& P. analyst, and lawyers for the plaintiffs in these cases are sure to point them out. There is little chance that a meteorologist has a financial stake in saying, “It’s going to be sunny.” The rating agencies, on the other hand, essentially get paid by the people who need a prediction of clear skies, and the customers can always ask a different forecaster if they don’t hear what they like.

So, readers, what do you think? Is going after a ratings agency that made a bad prediction like suing an errant economist or a weatherman? Or is it like suing a negligent physician? Or is it like pursuing Wall Street research analysts whose work was tainted by conflicts of interest?

Your views are welcome, in the comments.

A Matter of Opinion? [New York Times]

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Posted in: Cahill Gordon & Reindel, Floyd Abrams, Wall Street

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