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Did You Know an S&P Rating is Constitutionally Protected Speech?!?!

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No, seriously. The ratings that S&P, Moody's, Fitch, et al assign are considered protected speech under the First Amendment.

As a 2005 memorandum written for Standard & Poor's [PDF] by law firm Cahill Gordon & Reindel states in no uncertain terms:



In a wide array of circumstances, state and federal courts have consistently recognized that S&P and other rating agencies are entitled to the same First Amendment protections as other financial publishers such as BusinessWeek and The Wall Street Journal.

These decisions have been based on widespread judicial recognition that, at their core, rating agencies perform First Amendment functions by gathering information, analyzing it and disseminating opinions about it -- in the form of credit ratings and commentary -- to the general public. Indeed, in 2004 S&P disseminated its ratings, commentaries and industry reports through approximately 14,000 media releases, 4,000 commentaries, 15,000 analyses and updates, and 21,000 surveillance summaries. In addition, every year S&P publishes 51 issues of CreditWeek, a weekly print publication on fixed-income securities. All of S&P’s published rating actions are also made available to the public for free on its Web site, along with thousands of articles of fixed income-related commentary.

And in 2009, First Amendment lawyer Floyd Abrams argued, “It shouldn’t change the legal dynamics that rating agencies are more important, or play a greater role, or are looked to by this or that element of the marketplace. The major similarity here is that both the newspaper and S & P are offering opinions on matters that people can and do disagree about.”

For all the ink that has been spilled over S&P's downgrade of the US debt from AAA to AA+, S&P's own lawyers make more than perfectly clear that ratings agencies do nothing more than offer opinions and commentary on bonds "to the public for free on its Web site." A 1999 ruling by a federal court in the Ninth Circuit affirmed that the ratings issued by S&P aren't even considered advice -- no, they're just like the "opinions" offered on To the proprietors of, you just got a huge credibility boost.

Though the recent financial reform bill brought ratings agencies' First Amendment rights in line with those of accounting firms and other, similar advisory concerns, it has not yet been tested in court -- but it may be now.

The New York Times is reporting that "Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews."

Writes Louise Story:

In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

Will the First Amendment argument hold up? We'll soon find out if the favorable position S&P parent company McGraw-Hill has spent $11 million over the past 15 years lobbying for (including at least $1 million on S&P-related legislation, according to the Washington Post, using data from the Sunlight Foundation) gets re-upped.
POSITION:  No positions in stocks mentioned.