Credit rating agencies and the first amendment: Applying constitutional journalistic protections to subprime mortgage litigation

Minnesota Law Review

Volumn 94, Issue 1, 2010, Pages 140-167

  Nagy, Theresa ^a  

^a UNIVERSITY OF MINNESOTA   (United States)

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EID: 79551481641     PISSN: 00265535     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (221)

1. Amit R. Paley, Credit-Rating Firms Grilled over Conflicts: Risks Were Known, Documents Show, WASH. POST, Oct. 23, 2008, at A1 (quoting Representative Henry A. Waxman, the Chairman of the House Committee on Oversight and Government Reform).
2. See id. ("Executives at the country's leading credit-rating companies, whose optimistic assessments of risky investments helped fuel the financial meltdown, have privately acknowledged for more than a year that conflicts of interest contributed to the industry's failures, according to internal company documents ⋯.").
3. See DICK K. NANTO, CONG. RESEARCH SEW., THE U.S. FINANCIAL Crisis: The Global Dimension with Implications for U.S. Policy 9-11 (2009), available at http://graphics8.nytimes.com/packages/pdf/globaleconcrs.pdf.
4. Aaron Unterman, Innovative Destruction-Structured Finance and Credit Market Reform in the Bubble Era, 5 HASTINGS BUS. L.J. 53, 79 (2009).
5. Id. ("As of July 2008, at least 132 subprime and [structured-finance] related class action lawsuits have been initiated in the [United States].").
6. Id. Most of these defendants rendered themselves judgment proof, however, by either closing their businesses completely or filing for bankruptcy.
7. See generally Martha Graybow, Credit Rating Agencies Fending Off Lawsuits from Subprime Meltdown, INS. J., July 14, 2008, http://insurancejournal.com/ news/national/2008/07/14/91841.htm (providing an overview of recent litigation against rating agencies).
8. See, e.g., Complaint at 2, In re Moody's Corp. Sec. Litig., 612 F. Supp. 2d 397 (S.D.N.Y. 2009) (No. 07 CIV 8375) (charging that Moody's assigned "excessively high ratings to bonds backed by risky subprime mortgages");
9. Complaint for Violation of Federal Securities Laws at 1, Ind. Laborers Pension Fund v. Fimalac, S.A., No. 1:08 CV 05994 (SAS) (S.D.N.Y. voluntarily dismissed Oct. 3, 2008) (charging that Fitch failed to disclose that its ratings of residential mortgage-backed securities and collateralized debt obligations were based on misleading information);
10. Consolidated Class Action Complaint for Securities Fraud at 1-4, Eeese v. Bahash, 248 F.E.D. 58 (D.D.C. 2008) (No. l:07-cv-01530-CKK) (charging that S&P assigned misleading ratings to sub-prime residential mortgage-backed securities and collateralized debt obliga-tions).
11. See Gretchen Morgenson, House Panel Scrutinizes Ratings Firms, N.Y. TIMES, Oct. 23, 2008, at B5.
12. Id. (quoting Eepresentative Henry A. Waxman, the Chairman of the House Committee on Oversight and Government Eeform).
13. See NANTO, supra note 3, at 11 fig.2.
14. Stéphane Eousseau, Enhancing the Accountability of Credit Rating Agencies: The Case for a Disclosure-Based Approach, 51 McGILL L.J. 617, 621 (2006) (describing rating agencies as having become "central institutions in financial markets").
15. Id. at 642 (noting that liability "plays a limited role in disciplining rating agencies operating in the American markets").
16. Gregory W. Smith, The Deterioration of Investor Tools and the Resulting Fiduciary Challenges, 57 J. GOV'T PIN. MGMT. 26, 29 (2008).
17. See id.
18. See also U.S. CONST, amend. I (establishing that "Congress shall make no law ⋯ abridging the freedom of speech, or of the press").
19. N.Y. Times. Sullian, 376 U.S. 254, 280 (1964).
20. Arthur R. Pinto, Control and Responsibility of Credit Rating Agencies in the United States, 54 AM. J. COMP. L. 341, 352-53 (2006).
21. Id. at 353.
22. See Paley, supra note 1, at A1.
23. See, e.g., Deven Sharma, Op-Ed, The Market Alone Won't Make It, WASH. TIMES, Mar. 6, 2009, at A19 (agreeing that new regulations may be necessary in these "unprecedented times" and stating that "[w]e at Standard & Poor's agree with President Obama's call for an open and transparent financial system that speaks in plain language investors can understand");
24. STANDARD & Poor's, Description of New Actions to Strengthen Ratings Process and Better Serve Markets 1-10 (2008), http://www2.standardandpoors.com/ spf/pdf/media/Leadership-Action-Details.pdf (describing new policies that Standard & Poor's has adopted to improve the transparency, accuracy, and credibility of their credit ratings).
25. See Paley, supra note 1, at A1.
26. See TIMOTHY J. SINCLAIR, THE NEW MASTERS OF CAPITAL: AMERICAN BOND EATING AGENCIES AND THE POLITICS OF CREDITWORTHINESS 24 (2005).
27. See Frank Partnoy, The Siskel and Ebert of Financial Markets?: Two Thumbs Down for the Credit Rating Agencies, 11 WASH. U. L.Q. 619, 632 (1999) ("Eating agencies may exist because of information asymmetry between debt issuers and investors. Information asymmetry exists in markets where sellers have superior information to buyers about product quality, yet cannot costlessly convey this information to buyers.");
28. Amy K. Ehodes, The Role of the SEC in the Regulation of the Rating Agencies: Well-Placed Reliance or Free-Market Interference?, 20 SETON HALL LEGIS. J. 293, 294 (1996) (describing how rating agencies create "an efficient interface between investors and issuers" that reduces the cost of securities research for individual inestors).
29. See Eousseau, supra note 12, at 627.
30. Amy Borrus et al., The Credit Raters: How They Work and How They Might Work Better, BUS. WK., Apr. 8, 2002, at 38;
31. See also Pinto, supra note 17, at 341.
32. Timothy J. Sinclair, Passing Judgment: Credit Rating Processes as Regulatory Mechanisms of Governance in the Emerging World Order, in GLOBALIZATION AND ECONOMY: GLOBALIZING FINANCE AND THE NEW GLOBAL ECONOMY 248, 253 (Paul James & Heikki Patomaki eds., 2007) (citation omitted).
33. See Borrus et al., supra note 25, at 38. The agencies utilize a letter-based rating system, in which "AAA," the highest score, is awarded to financially stable companies and "D" is given to companies in default. DAVID F. HAWKINS ET AL., RATING INDUSTRIAL BONDS 25-29 (1983);
34. Rhodes, supra note 23, at 303 n.41.
35. Frank Packer, Credit Ratings and the Japanese Corporate Bond Market, in RATINGS, RATING AGENCIES AND THE GLOBAL FINANCIAL SYSTEM 139, 140 (Richard M. Levich et al. eds., 2002). Generally, anything below a "BBB" rating is considered noninvestment grade or a "junk bond."
36. See Mark Carey, A Guide to Choosing Absolute Bank Capital Requirements, in RATINGS, RATING Agencies and the Global Financial System, supra, at 117, 134
37. See Mark Carey, A Guide to Choosing Absolute Bank Capital Requirements, in RATINGS, RATING Agencies and the Global Financial System, supra, at 117, 134.
38. Jerome S. Fons, Moody's Investors Serv., Special Comment: TRACING THE ORIGINS OF "INVESTMENT GRADE" 2 (2004), available at http://www.moodys.com.br/brasil/pdf/InvGradeOrigins.pdf http://www.moodys.com. br/brasil/pdf/InvGradeOrigins.pdf (explaining how during the Great Depression the United States Office of the Comptroller of the Currency required bank holdings of publicly rated bonds to be rated at investment grade or better). The regulation specified that "bonds rated [investment grade] may be carried at cost, but defaulted bonds and those of lower ratings had to be marked to market." Id.
39. For a description of the structure of the credit rating business and the significance of the NRSRO designation, see generally Claire A. Hill, Regulating the Rating Agencies, 82 WASH. U. L.Q. 43 (2004). There are currently ten agencies designated as NRSROs. U.S. Sec. & Exch. Comm'n, Credit Rating Agencies-NRSROs, http://www.sec.gov/answers/nrsro.htm (last visited Oct. 20, 2009).
40. See Frank Partnoy, The Paradox of Credit Ratings, in RATINGS, RATING Agencies, and the Global Financial System, supra note 28, at 65, 67.
41. But see Credit Rating Agencies and the Financial Crisis: Hearing Before the H. Comm. on Oversight and Government Reform, 110th Cong. 1, 2-3 (2008) (statement of Rep. Henry A. Waxman, Chairman, H. Comm. on Oversight and Government Reform), available at http://oversight.house.gov/documents/ 20081022102221.pdf (repeating claims by Ray McDaniel, CEO of Moody's, that the market "penalizes quality" and citing an S&P employee document that claimed "[a security] could be structured by cows and we would rate it").
42. See Paley, supra note 1, at A1.
43. Graybow, supra note 7.
44. See Amendments to Rules for Nationally Recognized Statistical Rating Organizations, Exchange Act Release No. 34-59342, 74 Fed. Reg. 6456, 6465-67, 6483 (Feb. 2, 2009) (to be codified at 17 C.F.R. pts. 240, 249b), available at http://www.sec.gov/rules/final/2009/34-59342fr.pdf (including a ban on rating a security after the agency has made recommendations regarding the issuer's structure of the finance product, a restriction on rater participation in fee discussion, and significant new disclosure obligations for rating agencies).
45. Press Release, Office of the N.Y. State Attorney General Andrew M. Cuomo, Attorney General Cuomo Announces Landmark Reform Agreements with the Nation's Three Principal Credit Rating Agencies (June 5, 2008), http://www.oag.state.ny. us/media-center/2008/jun/june5a-08.html.
46. See SEC. INDUS. & FIN. MET. ASS'N, INCLUDING JUMBOS IN TBA-ELIG1BLE POOLS WILL RESULT IN HIGHER COSTS FOR BORROWERS 1 (2008), http://www.sifma.org/ capital-markets/docs/TBA-Pools-2008-MBS-Brief.pdf.
47. See U.S. Sec. & Exch. Comm'n, Mortgage-Backed Securities, http://www.sec.gov/answers/mortgagesecurities.htm (last visited Oct. 20, 2009).
48. See Derrick M. Land, Residential Mortgage Securitization and Consumer Welfare, 61 CONSUMER FIN. L.Q. REP. 208, 209 (2007).
49. See id.
50. See Vikas Bajaj, Foreclosures Rose as Delinquencies Eased in Quarter, N.Y. TIMES, Sept. 6, 2008, at B8.
51. Number of Foreclosures Soared in 2007, MSNBC, Jan. 29, 2008, http://www.msnbc.msn.com/id/22893703 http://www.msnbc.msn.com/id/22893703.
52. See NANTO, supra note 3, at 9-11.
53. See Unterman, supra note 4, at 69-70.
54. Staff of the Office of Compliance Inspections & Examinations, U.S. Sec. & Exch. Comm'n, Summary Report of Issues Identified in the Commission Staff's Examination of Select Credit Rating Agencies 7 (2008) [hereinafter 2008 SEC REPORT], available at http://www.sec.gov/news/studies/2008/ craexamination070808.pdf.
55. Id. An arranger could typically appeal an unfavorable ratings deci-sion. Id. at 9. Also remarkable is the fact that the rating agency received compensation only if the rating was issued. Id. Land, supra note 38, at 211.
56. See Unterman, supra note 4, at 69-70.
57. See id. at 95-96.
58. See Gretchen Morgenson, The End of Banking as We Know It, N.Y. TIMES, Jan. 18, 2009, at B1.
59. See Vikas Bajaj, Markets Limp into 2009 After a Bruising Year, N.Y. TIMES, Dec. 31, 2008, at B1.
60. Complaint for Negligent Misrepresentation Under Common Law and Cal. Civ. Code §§ 1709 and 1710 and Negligent Interference with Prospective Econ. Advantage, Cal. Pub. Employees' Retirement Sys. v. Moody's Corp., No. CGC-09-490241 (Cal. App. Dep't Super. Ct. July 9, 2009) [hereinafter CalPERS Complaint]. S&P's parent company and Pitch are also named defendants in this case. Id.
61. Jacqueline Bell, CalPERS Sues Rating Agencies over $1B in Losses, LAW360, July 15, 2009, http://www.law360.com/articles/111413.
62. Id.
63. CalPERS Complaint, supra note 51, at 1.
64. Bell, supra note 52.
65. See, e.g., Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 751 (1985) (addressing allegations that a rating agency graded a construction contractor's securities too low in a private rating);
66. Jefferson County Sch. Dist. v. Moody's Investor's Servs., Inc., 175 F.3d 848, 850-51 (10th Cir. 1999) (ruling on claims brought by county that the credit rating had provided inaccurately low and unsolicited public ratings).
67. See Unterman, supra note 4, at 98;
68. See also Kenneth C. Kettering, Securitization and Its Discontents: The Dynamics of Financial Product Development, 29 CARDOZO L. Rev. 1553, 1687-93 (2008) (discussing rating agencies' liability for their ratings).
69. See Staff of S. Comm. on Gov't Affairs, 107th Cong., Financial Oversight of Enron: The SEC and Private-Sector Watchdogs 82 (2002) [hereinafter FINANCIAL OVERSIGHT];
70. See also 17 C.F.R. § 230.436(g)(1) (2007) (mandating an express exemption for NRSROs from liability under § 11 of the Securities Act of 1933).
71. See Kettering, supra note 57, at 1689.
72. Id. at 1688 (citing Partnoy, supra note 31, at 79).
73. Id. at 1691;
74. See also, e.g., Quinn v. McGraw-Hill Co., 168 F.3d 331, 336 (7th Cir. 1999) (holding reliance on ratings was unreasonable);
75. First Equity Corp. v. Standard & Poor's Corp., 869 F.2d 175, 179 (2d Cir. 1989) (finding parties not to be in privity). Kettering, supra note 57, at 1689. Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n, 447 U.S. 557, 593 (1980).
76. Kettering, supra note 57, at 1689.
77. Id.
78. Id. (describing the standard in New York Times v. Sullivan, 376 U.S. 254, 280 (1964)).
79. See Larry P. Ellsworth & Ishan K. Bhabha, A New Front in Subprime Litigation: Can Rating Agencies Be Held Liable?, LAW360, Aug. 12, 2008, http://www.law360.com/articles/65936 (describing the standard in Am. Sav. Bank v. UBS PaineWebber, Inc. (In re Fitch, Inc.), 330 F.3d 104, 109-10 (2d Cir. 2003) (per curiam)).
80. Compare Sullivan, 376 U.S. at 279-80 (providing a blanket protection to rating agencies absent "actual malice"), with In re Fitch, Inc., 330 F.3d at 109-10 (noting the absence of First Amendment protection when a rating agency's actions are based on client needs).
81. Sullivan, 376 U.S. at 280; see also Hustler Magazine, Inc. v. Falwell, 485 U.S. 46, 52 (1988);
82. Gertz v. Robert Welch, Inc., 418 U.S. 323, 348-49 (1974).
83. Sullivan, 376 U.S. at 285.
84. Id. at 279, 282, 285;
85. See also Falwell, 485 U.S. at 50 ("At the heart of the First Amendment is the recognition of the fundamental importance of the free flow of ideas and opinions on matters of public interest and concern."). Some courts have found the reports of the credit rating agencies to constitute matters of public interest and concern.
86. See, e.g., In re Enron Corp. Sec, Derivative & ERISA Litig., 511 F. Supp. 2d 742, 829-30 (S.D. Tex. 2005) ("The credit rating reports regarding Enron by national credit rating agencies were not private or confidential, but distributed 'to the world' and were related to the creditworthiness of a powerful public corporation that operated internationally.");
87. County of Orange v. McGraw Hill Co., 245 B.R. 151, 155 (CD. Cal. 1999) (finding the county's debt offerings a matter of concern as the plaintiffs alleged the rating agency's actions caused them to incur 500 million dollars worth of debt).
88. Sullivan, 376 U.S. at 272 (citation omitted).
89. Id. at 280.
90. See Kettering, supra note 57, at 1689.
91. McGraw Hill Co., 245 B.R. at 156 (granting the defendant's motion for summary judgment on breach of contract and professional negligence claims since the county was unable to show that S&P had acted "with knowledge that the statement was false or with reckless disregard for whether or not it was true" in rating the county's debt securities (quoting Falwell, 485 U.S. at 52)).
92. Id. at 157.
93. Id. at 155 (citing Sullivan, 376 U.S. at 280).
94. In re Enron Corp. Sec, Derivative & ERISA Litig., 511 F. Supp. 2d 742, 829-30 (S.D. Tex. 2005).
95. Id. at 825.
96. Id.
97. Id.
98. Jefferson County Sch, Dist. v. Moody's Investor's Servs., Inc., 175 F.3d 848, 856 n.3 (10th Cir. 1999) (quoting Gregory Husisian, What Standard of Care Should Govern the World's Shortest Editorials?: An Analysis of Bond Rating Agency Liability, 75 CORNELL L. REV. 411, 460 (1990)).
99. In re Enron Corp., 511 F. Supp. 2d. at 824 n.82.
100. Id.
101. Gertz v. Robert Welch, Inc., 418 U.S. 323, 342 (1974).
102. In re Fitch, Inc., 330 F.3d 104, 109-10 (2d Cir. 2003) (per curiam).
103. Id. (describing how the subpoena sought disclosure of Fitch's communications with the defendant regarding the ratings of securities that the defendant had offered the plaintiff).
104. Id.
105. See also N.Y. CIV. RIGHTS LAW § 79-h(b)-(c) (McKinney 1992) (exempting professional journalists and newscasters from contempt charges with an absolute protection for confidential news and a qualified protection for nonconfidential stories).
106. In re Fitch, Inc., 330 F.3d at 109-10.
107. Id. at 110-11.
108. Mat 109.
109. Id. (citing Pan Am Corp. v. Delta Air Lines, Inc. (In re Pan Am Corp.), 161 B.E. 577, 583 (S.D.N.Y. 1993)).
110. Id. at 110.
111. Id.
112. Id. at 110-11.
113. Id.
114. Id. at 111. The New York statute at issue in the case defines "professional journalist" as: [O]ne who, for gain or livelihood, is engaged in gathering, preparing, collecting, writing, editing, filing, taping or photographing of news intended for a newspaper, magazine, news agency, press association or wire service or other professional medium or agency which has as one of its regular functions the processing and researching of news intended for dissemination to the public; such person shall be someone performing said function either as a regular employee or as one otherwise professionally affiliated for gain or livelihood with such medium of communication. N.Y. CIV. RIGHTS LAW § 79-h(a)(6) (McKinney 1992).
115. In re Fitch, Inc., 330 F.3d at 111. ("For the sake of clarity, we note that we are not deciding the general status of a credit rating agency like Fitch un der New York's Shield Law: Whether Fitch, or one of its rivals, could ever be entitled to assert the newsgathering privilege is a question we leave for anoth er day.").
116. See id.
117. See, e.g., Commercial Pin. Servs., Inc. v. Arthur Andersen LLP, 94 P.3d 106, 110 (Okla. Civ. App. 2004).
118. See id.
119. See Steven L. Schwarcz, Private Ordering of Public Markets: The Rating Agency Paradox, 2002 U. ILL. L. REV. 1,15.
120. See Commercial Fin. Servs., Inc., 94 P.3d at 109-12.
121. Id. at 108.
122. Id. at 110, 112.
123. Id. at 112-13.
124. Id. at 110 (contrasting case at hand with Jefferson County Sch. Dist. v. Moody's Investor's Servs., Inc., 175 F.3d 848 (10th Cir. 1999)).
125. Jefferson County Sch. Dist., 175 F.3d at 850.
126. See id. at 856.
127. CalPERS Complaint, supra note 51.
128. County of Orange v. McGraw Hill Co., 245 B.R. 151 (CD. Ca. 1999).
129. In re Enron Corp. Sec, Derivative & ERISA Litig., 511 F. Supp. 2d 742 (S.D. Tex. 2005).
130. U.S. CONST, amend I.
131. Aaron Unterman, Exporting Risk: Global Implications of the Securitization of U.S. Housing Debt, 4 HASTINGS BUS. L.J. 77, 124-25 (2008).
132. See In re Enron Corp., 511 F. Supp. 2d at 825.
133. N.Y. Times v. Sullivan, 376 U.S. 254, 285 (1964) (quoting Speiser v. Randall, 357 U.S. 513, 525 (1958)).
134. Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n, 447 U.S. 557, 562-63 (1980) (finding that commercial speech is not wholly outside the protection of the First Amendment);
135. See also Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 456 (1978) (finding that commercial speech occupies a "subordi-nate position in the scale of First Amendment values").
136. See, e.g., In re Enron Corp., 511 F. Supp. 2d at 825.
137. See, e.g., id. at 819 ("[A]n examination of the specific facts and circumstances of a credit rating agency's report is necessary to determine the extent, if any, of First Amendment protection it should receive.").
138. See, e.g., id.; County of Orange v. McGraw Hill Co., 245 B.R. 151, 160 (CD. Ca. 1999).
139. See, e.g., In re Enron Corp., 511 F. Supp. 2d at 825 (citing what the court claimed "to be a policy of heightened protection for credit reports under the First Amendment" in allowing the credit rating agencies to use the defense).
140. See Schwarcz, supra note 102, at 15.
141. Kettering, supra note 57, at 1690.
142. See Partnoy, supra note 23, at 664.
143. Cf. Jonathan M. Barnett, Certification Drag: The Opinion Puzzle and Other Transactional Curiosities, 33 J. CORP. L. 95, 139 (2007) (discussing certification practices and credit agencies).
144. Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n, 447 U.S. 557, 562-63 (1980).
145. See, e.g., Commercial Fin. Servs., Inc. v. Arthur Andersen LLP, 94 P.3d 106, 110 (Okla. Civ. App. 2004) (holding that the First Amendment did not protect Moody's when it had been paid for the rating);
146. cf. Jefferson County Sch. Dist. v. Moody's Investor's Servs., Inc. 175 F.3d 848, 860 (10th Cir. 1999) (holding that the First Amendment was applicable when Moody's had neither been asked to rate the bond nor paid for its services and plaintiff failed to allege a provably false statement).
147. Hill, supra note 30, at 50; Rhodes, supra note 23, at 308-09.
148. Lawrence J. White, The Credit Rating Industry: An Industrial Organization Analysis, in RATINGS, RATING AGENCIES AND THE GLOBAL FINANCIAL SYSTEM, supra note 28, at 41, 47.
149. See Richard Cantor & Frank Packer, The Credit Rating Industry, FED. RES. BANK OF N.Y. Q. REV., Summer-Fall 1994, at 1, 4, available at http://www.newyorkfed.org/researeh/quarterly-review/1994v19/v19n2artielel.pdf;
150. See also Roy C. Smith & Ineo Walter, Rating Agencies: Is There an Agency Issue?, in RATINGS, RATING AGENCIES AND THE GLOBAL FINANCIAL SYSTEM, supra note 28, at 289, 298-301 (describing the three major rating agencies).
151. See Smith & Walter, supra note 130, at 289-91;
152. See also Jill E. Fisch & Hillary A. Sale, The Securities Analyst as Agent: Rethinking the Regulation of Analysts, 88 IOWA L. REV. 1035, 1080 (2003) (proposing a theory of agency for securities analysts).
153. Commercial Fin. Servs., Inc., 94 P.3d at 110.
154. Id.
155. See, e.g., Jefferson County Sch. Dist. v. Moody's Investor's Servs., Inc. 175 F.3d 848, 860 (10th Cir. 1999) (allowing the First Amendment to protect Moody's);
156. See also Partnoy, supra note 23, at 711 (arguing that "credit rating agencies should not have their cake and eat it too" by benefiting from ratings-dependent regulation and simultaneously receiving First Amendment protections from misrepresentation claims).
157. Pan Am Corp. v. Delta Air Lines, Inc. (In re Pan Am Corp.), 161 B.R. 577, 581 (S.D.N.Y. 1993) (citing that S&P did not merely provide ratings to issuers who paid a fee).
158. 2008 SEC REPORT, supra note 44, at 23.
159. Id.
160. Kettering, supra note 57, at 1691;
161. See also Partnoy, supra note 23, at 664 ("These transactions indicate that the agencies are selling something other than the information associated with a particular rating.").
162. See, e.g., In re Fitch, Inc., 330 F.3d 104, 111 (2d Cir. 2003).
163. Id.
164. See Partnoy, supra note 23, at 652-54.
165. Id. at 652.
166. Rousseau, supra note 12, at 629. Downgrades became nearly impossible to make. See Jonathan R. Macey, A Pox on Both Your Houses: Enron, Sar-banes-Oxley and the Debate Concerning the Relative Efficacy of Mandatory Versus Enabling Rules, 81 WASH. U. L.Q. 329, 342 (2003) (arguing that issues "capture" rating agencies and prevent them from reporting a downgrade, a so-called nuclear bomb).
167. The Role of Credit Rating Agencies in the Structured Financial Market: Hearing Before the Subcomm. on Capital Markets, Insurance, and Government Sponsored Enterprises of the H. Comm. on Financial Services, 110th Cong. app. at 70-71 (2007) (statement of J. Kyle Bass, Managing Partner, Hayman Capital Partners, L.P.).
168. See, e.g., In re Fitch, Inc., 330 F.3d at 109.
169. Turmoil in the Financial Markets: Hearing Before the H. Comm. on Oversight and Government Reform, 110th Cong. (2008) (statement of Sean J. Egan, Managing Dir., Egan-Jones Rating Co.) ("[D]ebt issuers invite some or all of the major rating agencies to preview the collateral pools so the rating agencies can provide preliminary rating indications that can be used to size the bond classes and structure the bond transactions.").
170. See id.
171. See Frank Partnoy, How and Why Credit Rating Agencies Are Not Like Other Gatekeepers, in FINANCIAL GATEKEEPERS 59, 88 (Yasuyuki Fuchita & Robert E. Litan eds., 2006) (describing an opinion as a recommendation whereas a certification is far more influential than mere advice).
172. But see Assessing the Current Oversight and Operations of Credit Rating Agencies: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 109th Cong. 50 (2006) (statement of Prank Partnoy, Professor of Law, University of San Diego School of Law) ("Credit ratings are not merely opinions, any more than fairness opinions of investment banks, audit opinions of accounting firms, legal opinions of attorneys, buy/sell ratings of securities analysts, or even the certifications of financial statements made by CEO's and CFO's are mere opinions.").
173. In re Enron Corp. Sec, Derivative & EBISA Litig., 511 F. Supp. 2d 742, 822 (S.D. Tex. 2005). For example, S&P's Eating Services stated that "[a] Standard & Poor's credit rating represents Standard & Poor's opinion as of a specific date on the creditworthiness of an obligor." Standard & Poor's Eatings Services, Statement of Standard & Poor's on Credit Eating Agencies to the U.S. Securities and Exchange Commission (Nov. 15, 2002), http://www.sec.gov/news/extra/credrate/standardpoors.htm.
174. See Milkovich v. Lorain Journal Co., 497 U.S. 1, 18 (1990).
175. Id. at 19.
176. Id. at 20.
177. Id.
178. Id. at 21.
179. Id.
180. See 2008 SEC EEPORT, supra note 44, at 7.
181. Partnoy, supra note 31, at 89 n.104 (citing FINANCIAL OVERSIGHT, supra note 58, at 124). The agencies' business depends on the high market value of their ratings, so although they issue disclaimers, they do not actively attempt to diminish the significance of the ratings in the industry.
182. See id. at 49.
183. Id. at 89 n. 104.
184. Id.; see also Partnoy, supra note 23, at 690 ("[R]atings have been incorporated ⋯ in various substantive areas, including securities, pension, banking, real estate, and insurance regulation.").
185. See Great Plains Fed. Sav. & Loan Ass'n v. Dabney, 846 P.2d 1088, 1092 (Okla. 1993).
186. See id. at 1091.
187. Commercial Fin. Servs., Inc. v. Arthur Andersen LLP, 94 P.3d 106, 110 (Okla. Civ. App. 2004).
188. Id. But see Jefferson County School Dist. v. Moody's Investor's Servs. Inc., 175 F.3d 848, 856 (10th Cir. 1999) (noting that the information was not guaranteed to be accurate and asserting that Moody's ratings are opinions).
189. See In re Fitch, Inc., 330 F.3d 104, 111 (2d Cir. 2003).
190. See id. at 109-10.
191. See NANTO, supra note 3, at 11 fig.2.
192. In re Fitch, Inc., 330 F.3d at 109-11.
193. Id. at 109-10.
194. Id.
195. See id. at 110.
196. Id.; cf. Schwarcz, supra note 102, at 15-17 (discussing the "conflict of interest inherent in the way ratings agencies are paid").
197. In re Fitch, Inc., 330 F.3d at 110. The 2009 amendments to the SEC rules address this prong and were proposed to prohibit an NRSRO from rating an issuer after it has made recommendations regarding the issuer's activities. See Amendments to Rules for Nationally Recognized Statistical Rating Organizations, Exchange Act Release No. 34-59342, 74 Fed. Reg. 6456, 6474 (Feb. 9, 2009), available at http://www.sec.gov/rules/finay2009/34-59342fr.pdf ("The amendments to Rule 17g-5 will prohibit an NRSRO from issuing or maintaining a credit rating where the NRSRO or an affiliate provided recommendations on the structure of the transaction being rated ⋯ .");
198. See also 17 C.F.R. § 240.17g-5 (2009).
199. In re Fitch, Inc., 330 F.3d at 110.
200. Id. at 110-11;
201. Partnoy, supra note 23, at 664-68 (providing an overview of "ratings-driven transactions").
202. See In re Fitch, Inc., 330 F.3d at 106.
203. See Morgenson, supra note 9, at B5. (quoting Eep. Henry A. Waxman).
204. Partnoy, supra note 31, at 89 n.104 (quoting FINANCIAL OVERSIGHT, supra note 58, at 126).
205. See Cantor & Packer, supra note 130, at 5 (explaining that mutual and pension funds place limits on the amount of a portfolio that can be invested in noninvestment-grade securities and bonds).
206. Barnett, supra note 125, at 96 (identifying ratings agencies as a member of a group of "certification intermediaries" which provide "stamps of approval").
207. Compuware Corp. v. Moody's Investors Servs., Inc., 499 F.3d 520, 525-26 (6th Cir. 2007).
208. Id. at 526-27 (describing how Compuware had the opportunity to review Moody's ratings before they were issued).
209. See Paley, supra note 1, at A1, A8.
210. CalPERS Complaint, supra note 51, at 1-2.
211. See Bell, supra note 52;
212. Jennifer E. Bethel et al., Legal and Economic Issues in Litigation Arising from the 2007-2008 Credit Crisis (Harvard John M. Olin Center for Law, Econ. & Bus. Discussion Paper Series, Paper No. 612, 2008), available at http://ssrn.com/abstract=1096582 (describing the investment-grade requirement and similar litigation involving other funds).
213. CalPERS Complaint, supra note 51, at 1;
214. See also Bell, supra note 52.
215. White, supra note 129, at 47.
216. See Kettering, supra note 57, at 1691.
217. See Bell, supra note 52.
218. See, e.g., Va. State Bd. of Pharmacy v. Va. Citizens Consumer Council, Inc., 425 U.S. 748, 771 n.24 (1976) ("[C]ommercial speech may be more durable than other kinds ⋯ there is little likelihood of its being chilled by proper regulation ⋯ .").
219. Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 762 (1985).
220. Id. at 762-63.
221. Id. at 762. But see Jefferson County Sch. Dist. v. Moody's Investor's Servs., Inc., 175 F.3d 848, 856 n.3 (10th Cir. 1999) ("[0]ne commentator has concluded that the tort of negligent misrepresentation should not be extended to [rating agencies]: 'Courts cannot constitutionally allow recovery on any showing less than recklessness because of the potential chilling effect that imposing a negligence standard would have on rating publications.'" (quoting Husisian, supra note 82, at 460)).