Ohio's attorney general is suing the rating agencies in an attempt to recoup losses on its state retirement fund. The state's complaint is that the agencies' bad ratings cost it $457 million when securities it purchased lost value. This is not the first civil suit against the agencies and probably won't be the last. I noted a case back in September where a judge appeared more open-minded then usual regarding such a suit. Usually the agencies claim First Amendment protection on their ratings, claiming that they're merely opinions. Ohio alleges something beyond mere negligence, however. Yet, I'm still not convinced its particular complaint will succeed.
Here's some detail via the New York Times:
The lawsuit asserts that Moody's, Standard & Poor's and Fitch were in league with the banks and other issuers, helping to design an assortment of exotic financial instruments that led to a disastrous bubble in the housing market.
"We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters," the attorney general, Richard Cordray, said at a news conference. "At minimum, they were aiding and abetting misconduct by issuers."
Many people, including me, have been highly critical of the rating agencies. I've said that they should be held responsible for negligence, as I think the First Amendment claim is just silly. They provide expert opinions which are relied upon by investors. But I don't believe that their actions were generally so dastardly that their analysts deserve jail time.
In regard to Ohio's specific complaint, I don't think First Amendment protection would apply if a judge finds validity in the facts the state presents. After all, if the agencies were "in league with" banks and issuers' misconduct, then it sounds like they were accessories to defrauding investors. Free speech would have nothing to do with that, as fraud is illegal.
With that said, I find it highly unlikely that Ohio would succeed in satisfying this burden of proof. I know there are several isolated stories of rating agency analysts who weren't as prudent as they should have been or a little too cozy with bankers. But as I've said before, I don't believe that was a widespread problem. And I think proving that this was the norm at the agencies would pose an even greater challenge.
So might this complaint get past the First Amendment issue? Perhaps. Will it ultimately result in Ohio winning the case? Based on the argument presented here, I doubt it.