S&P Says California Trying to Silence Free Speech in Suit

Standard & Poor’s is asking a California judge to rule that its credit ratings are opinions protected by a state law meant to block lawsuits filed by the powerful to intimidate the weak.

Facing a $1 billion lawsuit by California Attorney General Kamala Harris over its assessments of mortgage-backed securities, the New York-based unit of McGraw Hill Financial Inc. said in court filings that its ratings are similar to newspaper editorials and shielded by a 1992 California statute barring meritless lawsuits intended to bully targets.

“From a free speech perspective, there’s no more dangerous opponent than the state,” Floyd Abrams, S&P’s attorney, said at a hearing today in state court in San Francisco.

S&P made a similar argument in a lawsuit filed by the California Public Employees’ Retirement System that, like Harris’s case, alleges S&P inflated credit assessments of investments backed by subprime mortgages purchased by state pension funds that later collapsed. While the judge in that case found credit ratings are a form of free speech protected by the law, he ruled last year that Calpers had shown sufficient evidence to let negligence claims against S&P go forward. S&P has appealed that decision.

Housing Boom

The California lawsuit is one of more than a dozen filed in February against S&P by the U.S. and a group of states over ratings on mortgage-backed securities during the housing boom.

Abrams, a free speech specialist at Cahill Gordon & Reindel LLP, said in February that the U.S. lawsuit isn’t a First Amendment case because the government is alleging that S&P didn’t believe in the ratings it gave, a claim that isn’t protected by the U.S. Constitution.

Yet the company is presenting a free-speech defense to San Francisco Superior Court Judge Curtis Karnow after failing to persuade him in August to dismiss Harris’ case because it was allegedly filed too late and no state money was involved in the pension funds’ securities purchases.

The credit rater last month filed a request to throw out the California case under California’s anti-SLAPP law. SLAPP stands for “strategic lawsuit against public participation.” The law was passed in response to lawsuits filed by real estate developers and other businesses against people and organizations opposing their projects.

Free Speech

If S&P can convince Karnow that ratings are a form of free speech, the burden of proof shifts to Harris to prove that there’s enough evidence for her to win on the merits of her complaint.

Harris alleged S&P used “guesses” and “magic numbers” to inflate ratings of mortgage-backed securities purchased by Calpers and the state’s teacher pension fund that ultimately lost more than $1 billion on the investments.

Rather than using independent and objective analysis to assign ratings to the securities, S&P lowered its standards and gave its highest credit ratings to risky securities to bolster its business with banks selling the investments, according to the complaint.

By claiming the practice violated a law against using false statements to defraud the state, the attorney general is allowed to seek triple damages.

Key Issue

Karnow said today that ratings are “opinions at their essence,” and the key issue in the case is whether Harris’s lawsuit is immune from attempts to dismiss it under California’s anti-SLAPP law, which includes an exception for enforcement lawsuits filed by state prosecutors.

Those types of cases aren’t the type of malicious lawsuits that the statute aims to protect against, said Rick Acker, an attorney for the state.

“Not every enforcement action qualifies” for the exception Karnow said.

Acker, a deputy state attorney general, told Karnow that Harris’s lawsuit falls squarely within the exception because it’s meant to protect the pension funds against fraud.

“By bringing this action she is protecting the community of which we are all a part,” Acker said. “Pension funds could not bring this case. This is a law enforcement case.”

The judge didn’t say when he would rule on the matter.

The case is California v. McGraw-Hill Cos., CGC 13-528491, California Superior Court (San Francisco).

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