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Monday, December 17, 2018

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.

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