Aug. 6 (Bloomberg) -- A lawyer called one day offering to pay me to write an article about him. He wanted it to run either in the city daily where I then worked or in a national legal newspaper where I sometimes freelanced.

His proposal sounded like the journalistic equivalent of a profession older than mine. I told him I get paid by the newspaper, not by the people I cover, and that was that.

The decades-old offer comes to mind because, faced with a wave of lawsuits, debt-rating companies defend the thumbs-up they gave to toxic debt in part by likening what they do to what journalists do. This lets them claim the same First Amendment right to be wrong that journalists have.

That they generally are hired by the very firms whose securities they rate doesn’t diminish their claim, they say. Each of them has said it expects to prove in court that these suits have no merit.

I don’t accuse the ratings companies of engaging in the old profession previously referenced. But in lawsuits from one coast to the other, shareholders, states and investors say the ratings weren’t exactly objective, either.

“This is issuing false opinions for profit,” Ronald Grassi, one of a growing number of people suing the top three raters, said in federal court last week.

A retired lawyer, Grassi represents himself and his wife, a retired teacher. They are suing Standard & Poor’s, Moody’s Investors Service and Fitch Ratings because they lost $40,000 by buying bonds issued by Lehman Brothers Holdings Inc. that all three rated as investment grade.

The Abrams Factor

Hardly the heftiest of the lawsuits against the firms, the Grassi case nonetheless brought to a Sacramento, California, courtroom a squad of lawyers defending the raters, chief among them legal legend Floyd Abrams.

Abrams, who represents Standard & Poor’s owners, McGraw Hill Cos., argued for the case’s dismissal. Within a half hour, the hearing was over without a ruling but with clear hints from the bench that the companies would prevail.

It is telling that McGraw Hill had brought in Abrams, known best for his First Amendment cases, and that the other lawyers, in court and in briefs, mostly second what he says. A partner in New York City-based Cahill Gordon & Reindel, Abrams was on the New York Times’ legal team in the landmark 1971 Pentagon Papers case and has represented most of the nation’s top news organizations.

The First Amendment defense won’t apply in many of the lawsuits against the rating companies, which will rely on other defenses. But in some of those cases, the freedom of speech claim could be the firms’ path out of the courthouse.

‘World’s Shortest Opinions’

For one thing, you can’t win a libel case against someone for publishing an opinion, as long as it contains no errors of fact. (This is one of the ironies of the law. You can thoroughly trash someone’s reputation, but as long as you leave out any facts for fear they could be wrong, you can’t be sued.)

Debt ratings “are the world’s shortest opinions,” says William McGuinness, who heads litigation in Fried, Frank, Harris, Shriver & Jacobson’s New York office.

“They’re three-letter opinions,” he says, and some courts have therefore ruled them eligible for First Amendment protection.

That issuers often pay the rating companies doesn’t change that, Abrams said, answering questions by e-mail.

“Newspapers and magazines carry advertisements from companies whose activities they describe or comment on” without giving up their constitutional rights, Abrams wrote.

Legal Protection

That isn’t all the help ratings firms get from the First Amendment. Once a court says they’re covered by it, the law makes it easier for them to defeat lawsuits because their ratings get the same extra protections given news stories about officials.

For a public figure to win a libel case, it isn’t enough that a reporter got the facts wrong. The official must prove the newspaper acted maliciously or didn’t care whether what it said was true.

Two federal appeals courts have said the same rule applies to rating firms. But both rulings were in cases brought by companies complaining about debt downgrades. That’s the opposite of the problem we have today.

Of course we want ratings firms to feel free to displease an issuer if that is where their research leads them. So it makes sense for them to get First Amendment protection.

Question of Precedent

But does that mean the rating company gets off the hook if it fails to look closely at the peculiar debt that underlies a security the client wants to sell?

“Because this issue was coming up in a different environment and in a different setting,” says McGuinness, “it’s not clear that courts will give the same weight to First Amendment defenses that once they did.”

The onslaught of cases that accuse the ratings companies of leading the country into economic chaos either by failing to perform due diligence or knowingly puffing up an issuer’s offering could tempt judges to take another look at the use of the First Amendment in such cases. In most of the country, no appellate court has set a clear precedent.

As for journalists, the truth is that somebody has to pay for the news. It’s a pretty good guess that among the thousands of Bloomberg LP subscribers who contribute to my paycheck whether they like it are not are Standard & Poor’s, Moody’s and Fitch.

(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net.

Last Updated: August 5, 2009 21:01 EDT