David Zaring is assistant professor of legal studies at the Wharton School of Business.
The United States government’s lawsuit against Standard & Poor’s proves that there is still life in the effort to hold financial institutions responsible for the financial crisis, for at least a little while longer. Three aspects of the suit are particularly interesting.
The first relates to the government’s insistence on an admission of guilt from S.&P. Such admissions are costly to extract, and often viewed as unnecessary - ordinary people do not admit guilt when they get divorced, or pay up after auto accidents, after all, even where the fault is clear.
Perhaps for this reason, the Securities and Exchange Commission has not required such admissions in the past, much to the consternation of some observers, and at least one judge. Jed S. Rakoff of Federal District Court in Manhattan reacted with horror to the S.E.C.’s nonadmission settlements with Citigroup and Merrill Lynch over wrongdoing related to the financial crisis.
The S.&P. suit shows that at least part of the government has come around to Judge Rakoff’s way of thinking. If so, we should expect to see fewer settlements and more court cases in the future.
A second aspect of the litigation offers context. It is always difficult to know whether the multimillion-dollar fines imposed on financial institutions are a hardship or a slap on the wrist, with the costs quickly passed on to the customers.
In this case, the government apparently asked S.&P. to pay $1 billion, which was too high a price for peace for the credit rating agency. The company apparently protested that that the sum amounted to its parent company’s yearly profit, a ratio that it could not abide. It provides some evidence of h! ow much will strike a defendant - even a well-heeled financial defendant - as too much.
The final interesting aspect of the lawsuit is constitutional. S.&P. will likely defend its ratings as protected by the First Amendment’s right to free expression. The First Amendment does not give anyone a right to commit fraud, as Steven M. Davidoff and Peter J. Henning have observed, and the sort of commercial speech that covers credit ratings is entitled to somewhat less protection than is core political speech.
But S.&P., founded by a journalist offering information to investors about railroads, has successfully invoked a “reporter’s privilege†to fend off lawsuits claiming that its ratings were issued negligently.
To be sure, that privilege has always been an uncertain one. Federal courts in Calfornia, where the suit has been filed, have not always recognized the reporter’s privilege even for newspaper and television reporters involved in criminal investigations, and plenty of other courts have dismissed its extension to credit ratings agencies.
Still, if S.&P. is singled out for ratings that were matched by the other ratings agencies, the government’s case might look like an exercise favoring certain speakers over others, and that might be a problem. It might even encourage the government to file lawsuits against other ratings agencies.
