Tuesday, August 12, 2008
Why We Need Federalism-7
"Connecticut Attorney General Richard Blumenthal sued the major credit-rating firms, alleging that they gave artificial low credit ratings to states, municipalities and other public entities. In three separate lawsuits, Mr. Blumenthal alleged Moody's Investors Service, Fitch Ratings and [S&P] Ratings Services 'systematically and intentionally' gave lower ratings to states, municipalities and other public entities than corporate and other forms of debt with similar or worse default rates. ... 'We are holding the credit rating agencies accountable for a secret Wall Street tax on Main Street: millions of dollars illegally extracted from Connecticut taxpayers.' said Mr. Blumenthal, a Democrat. ... Blumenthal alleged that the rating firms used a 'different and far more difficult rating scale' for public bonds in order to justify their lower ratings for those securities. ... In a statement, Mr. Blumenthal also said that the bond insurers have coordinated their efforts to convince Moody's to maintain their separate ratings systems for municipal and corporate bonds. ... Fitch called the attorney general's lawsuit an 'unfortunate development' and said it 'belives the suit is without merit and intends to defend itself vigorously.' ... McGraw-Hill described Connecticut's lawsuit as 'simply a case of a state attempting to use litigation to dictate what bond rating it receives.' The company said the claims violate its First Amendment rights and would result 'in an erosion of analytical independence and undermine investor confidence in the market'," my emphasis. Chad Bray at the WSJ, 31 July 2008.
The most interesting thing to come out of this case may be to see if Chris Cox's SEC files an amicus brief for the defendants under the theory that only the SEC may "regulate" the rating agencies (RA). It's more than time to shred McGraw-Hill's First Amendment (FA) defense. No one may use the FA to commit fraud, anymore than he can yell "fire" in a crowded theater. The FA is no defense to securities fraud, why is it a defense here? CPAs have gone to prison for fraud in connection with their "opinions", see for example US v Weiner, 578 F2d 757 (9th Cir., 1978). Why exempt other "opinion sellers"? My reading: Blumenthal mispled the case. He should file a conspiracy case against the: RAs and bond insurers (BI). The object of which is to give the RAs fees and the BIs premiums, derived from the localities. The advantages: greater liability and the possibility of a "James" determination, in which one co-conspirator's actions and declarations are admitted against them all during trial, US v. James, 576 F2d 1121 (5th Cir., 1978). An "erosion" of what? Undermine what? As for FA "protection", let McGraw-Hill read Aikens v. Wisconsin, 195 US 194, (1904, Holmes, J). "The statute [Sherman Act] is directed against a series of acts, and acts of several,--the acts of combining, with the intent of doing other acts. 'The very plot is an act in itself.' ... But an act which, in itself, is merely a voluntary muscular contraction, derives all its character from the consequences which will follow it under the circumstances in which it was done. ... No conduct has such an absolute privilege as to justify all possible schemes of which it may be a part. The most innocent and constitutionally protected of acts or omissions may be a step in a criminal plot, and if it is a step in a plot, neither its innocence nor the Constitution is sufficient to prevent the punishment of the plot by law", my emphasis. That's telling 'em Oliver!