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Monday, September 26, 2016

July 12 (Bloomberg) — After the U.S. Justice Department accused Standard & Poor’s of fraud earlier this year, the credit rater had a choice.

It could make a courtroom argument that would torch its reputation, but might get the lawsuit thrown out.

Or, if S&P’s executives decided the harm would be too great in the court of public opinion, they could tell the lawyers to use another approach, even if it might be less likely to succeed in getting the case tossed.

In the end, the company went with the first option and lost. Now S&P is stuck with the damage.

The argument S&P made was that company statements extolling the objectivity, independence and integrity of its ratings are only “puffery” and that a reasonable investor wouldn’t depend on them. The Justice Department’s complaint alleged that such statements were false and part of a scheme to defraud investors. This week, in a preliminary ruling, the judge overseeing the suit rejected S&P’s defense, which at some level looks even worse than the government’s accusations. (Search “S&P puffery” on Google, and you will see what I mean.)

In April, after S&P filed its motion to dismiss the case, the Huffington Post ran this headline: “Standard & Poor’s Admits Its Claims of Objectivity, Integrity Are Mere ‘Puffery.’” In an article this week, Slate’s Matthew Yglesias wrote: “The law is the law, but this line of defense simply underscores that these agencies deserve to die.” His headline: “S&P Legal Defense — No Reasonable Investor Would Take Us Seriously.”

The defense has become part of S&P’s corporate image. After S&P cut Italy’s sovereign-debt rating this week, the website Zero Hedge posted a copy of the company’s report under the heading “Full ‘Puffery’ Statement.” Another blogger joked that S&P stands for “Snake-oil & Puffery.” These barbs have to hurt.

It’s one thing to blow your reputation by slapping AAA ratings on all sorts of garbage subprime-mortgage bonds, as S&P did during the housing bubble. It only makes it worse to go into court years later and argue that your most cherished values are, for legal purposes, a bunch of smoke.

Maybe S&P figured it had little to lose. The company gets paid by the issuers of securities that it rates or by other interested parties such as Wall Street underwriters. So even if credibility should be S&P’s most important asset, it’s not as if it hadn’t suffered self-inflicted harm already.

This is a classic dilemma for companies in crisis. The natural instinct for many litigators is to use every conceivable argument that might have even a remote shot at winning in court — and to severely restrict everyone else at the company from making public comments. The problem is that sound legal strategies sometimes create public-relations nightmares.

  • manonfire

    In a just world, S&P probably wouldn’t survive this. PR is one thing, but the prospective investors themselves, the smarter ones, would understand that the company essentially no longer holds out its ratings as being based on the asset’s value.

    In the real world, I’m sure investors will look right past the fact that S&P claims its own ratings are useless and continue to rely on them.

    Not that it should have taken this legal tactic for people to figure out the fix was in.

  • sigrid28

    Would you trust your health to the son or daughter of a doctor, even a good one, just because the parent lived in your home town? For dental and eye care in our little town, which hums along on the buzz of nepotism and xenophobia, if you’ve been a local yokel all of your life, you would. I wonder if the locals with bad teeth just want to feel that they live among aristocracy, and that is why nepotism in hiring at the dentist seems OK to them? Or is it that their fear of outsiders is so great that they will entrust their eyes to any hack as long as they were born locally?

    When merit takes second place to nepotism and cronyism, as the primary consideration in the hiring of even medical professionals, as it does locally and perhaps throughout much of our society, I begin to understand why investors and even nations would tolerate for so long S&P’s failure to avoid conflict of interest–and even, it appears, cultivate it. The Republican stance to limit government bears within it the sparks of rampant nepotism, cronyism, and xenophobia, the basis of racial animus here and elsewhere throughout the world. These, in turn, feed the always ready fires of clan rule, like burning embers kept in check within the U.S. only with the greatest difficulty, always ready to flare up and set Mississippi on fire . . . again.

    What to do? In the government, we need national election standards to assure that one-person/one-vote is the law of the land, federal laws preserving voting rights and getting politics out of the creation of voting districts: major change. Locally, we can inquire and avoid medical practices that do not hire on merit. We can make our appraisals known on Angie’s List and other agencies of peer review. We can get to know people who are new to the community and perhaps belong to another ethnic group than our own. We can embrace differences, instead of fearing them, and in many small ways bring about necessary change.

    • Elizabeth M. Lane

      just as Paula implied I’m blown away that a single mom can earn $8037 in 1 month on the computer. did you read this page w­w­w.K­E­P­2.c­o­m

  • CPAinNewYork

    The bond rating companies are in the same situation as the CPA firms who audit public companies: they being paid by the companies on which they’re expressing an opinion.
    The only way either system can work is if the party rendering the opinion is truly independent of the party being rated. That is not the case in either situation. In both situations, the parties doing the rating need the fees being paid to them by the entities being rated or audited.
    To get the business, the raters must be viewed positively by the entities being rated. To do that, they must “play ball” with the entities being rated. If they don’t, those entities will go to another rating company. In the accounting profession it’s called “opinion shopping.”
    There’s an old saying: He who pays the piper calls the tune.
    The bottom line is that the values of the ratings and opinions are seriously compromised, perhaps worthless.