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S&P Won’t Employ First Amendment Defense in U.S. Ratings Lawsuit

McGraw-Hill Cos.’s Standard & Poor’s unit won’t rely on the argument that its rating opinions are protected by the U.S. Constitution’s guarantee of freedom of speech to defend against a government lawsuit, according to the company’s attorney Floyd Abrams.

“I don’t have any magic First Amendment wand in my pocket for this one,” Abrams said in an interview today with Bloomberg Television’s Sara Eisen. “It’s not a First Amendment case. The government is alleging that S&P didn’t believe what it said; the First Amendment doesn’t protect against that.”

The U.S. Justice Department filed a civil complaint in Los Angeles yesterday accusing McGraw-Hill and its S&P unit of three types of fraud, the first federal case against a ratings company for grades related to the credit crisis. A judge in San Francisco state court ruled in December 2010 that S&P’s ratings on three structured investment vehicles were a form a protected speech.

The ratings “were independent, they were the best judgment of S&P at the time about what the future would bring,” Abrams said. The financial crisis “was a lot worse than S&P predicted it would be and a lot worse than everyone else predicted it to be.”

Abrams said the firm, along with Federal Reserve Chairman Ben S. Bernanke and then-Treasury Secretary Henry Paulson, were “all in the same ballpark” as they “tried and everyone failed” to predict the severity of the financial crisis.

‘Extensive Discussions’

U.S. penalties could amount to as much as $5 billion, based on the losses suffered by federally insured financial institutions, the Justice Department said. S&P issued credit ratings on more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the complaint.

The ratings company had been in “extensive discussions” with the government over the accusations for at least a four-month period, Abrams said.

“There wasn’t any fraud,” Abrams said. “People at S&P cared a lot and fought a lot with each other and tried their best to come out with the right answers about what would happen in the future. That is no basis for bringing a lawsuit.”

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