The Malfeasance Column
Does the marketplace take Standard & Poor's seriously?
As you may have heard, the United States Department of Justice has brought a civil suit against Standard & Poor's (although curiously, not the company's fellow duopolist, Moody's) for inflating the ratings of various fixed-income securities from 2004 through 2007. The DOJ states that S&P engaged in a "scheme to defraud investors" by assigning overly generous ratings. According to the logic, S&P's leniency helped the newly issued securities to sell in the marketplace, and it encouraged those who issued them to return to S&P for additional business. The lawsuit notes that S&P could receive up to $150,000 in fines for each residential mortgage-backed security that it rated, and several times more for each collateralized debt obligation.
Standard & Poor's has mounted several defenses, the newest and most notable being the puffery defense. The puffery defense asserts that a company's marketing claims are so over-the-top that nobody could seriously believe them to be true, and thus the company should not be held liable for telling a lie. Examples would be a company marketing the "world's finest" pizza, or hawking its "everyday low prices." Last week, the company argued that it used puffery when it stated that its ratings were independent and objective.