After Citizens United, Americans are pushing back against the corporate misuse of the people’s free speech rights. But this battle is about more than campaign finance reform.
Add the credit rating agencies that rubber-stamped Wall Street’s toxic financial products to the list of corporations twisting the people’s First Amendment free speech rights to protect themselves from government regulation and lawsuits. The rating agencies assess risk in various financial products, including bonds, securities and derivatives. The corporations that operate these credit rating agencies get paid billions of dollars for this work and include Standard & Poor’s (McGraw-Hill Companies, $6.9 Billion annual revenue), Moody’s Corporation ($1.8 Billion annual revenue) and Fitch, Inc. (Fimalac, €560 million annual revenue).
These corporations are widely believed to have played a significant role in the 2008 economic collapse by giving unreasonably optimistic ratings to very questionable bonds, securities and more abstract creations of Wall Street, such as synthetic collateralized debt obligations. This led a number of institutional investors like local banks and municipal pension funds to unwittingly make precarious investments that ultimately went down the drain. Observers have attributed these allegedly misleading ratings to an unhealthy conflict of interest in which financial product issuers pay rating agencies for their assessments.
You might be wondering what this all has to do with the First Amendment and free speech. As rating agency corporations face demands for reform from Congress and a legion of angry investor lawsuits, they are hiding behind the argument that they have a corporate right to free speech, so they had no obligation to provide honest and accurate investment information. In fact, they are claiming the same rights as journalists, which means lawsuits against them must demonstrate “actual malice”, a high legal standard to meet. After earning billions of dollars for their rating fees, these companies are now claiming that thanks to the Supreme Court’s creation of corporate speech rights, they are not accountable for those ratings.
While the idea that corporations can use “free speech” to escape accountability for misleading investors and blow up economies may seem (and is) outrageous, the argument has had great success to date. Of the 30 lawsuits initiated against Standard & Poor’s, five have been dropped, and Standard & Poor’s has succeeded in 12 of its 15 motions to dismiss. One major case that has survived S & P’s motion to dismiss is Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc. In that case, the District Court recognized that while the courts in recent decades have indeed given rating agencies broad free speech rights in its publicly disseminated ratings, those speech rights are narrower in the context of private consultation. In essence, when someone is paying you for private advice, you do not have a free speech right to mislead. This case is in its early stages, and may turn on a variety of factors, including whether the ratings which privately or publicly disseminated.
While rating agencies have largely had their way in court, recent legislative efforts have been more successful. Senator Al Franken’s (D-MN) amendment to the financial reform bill would create a Credit Rating Agency Board that would pair bond issuers with rating agencies, ending the current conflict of interest. Senator George LeMieux’s(R-FL) amendment would strip a federal requirement that had essentially funneled institutional investors to the three major rating agencies.
It remains to be seen whether either of these amendments will survive in the legislative process (including the armies of Wall Street lobbyists), but it is likely that some form of rating agency reform is imminent. This could be a significant achievement, given the stranglehold rating agencies have had over Congress and the SEC in the past few decades. The SEC has proposed rating agency reforms on numerous occasions from the 1990s on, only to wilt in the face of whining and pressure from the rating agencies. Rating agencies similarly have always had a strong foothold in Congress, arranging lobbyist meetings with every member of the Senate Banking Committee during the financial reform deliberations. In 2009, the three major rating agencies spent $4,150,000 on lobbying, and they are on a similar pace for 2010. (source: opensecrets.org)
No matter how the battle in both the courts and the legislature comes out, the corporate “free speech” trump card that is increasing used when corporations run to court after losing legislative debates must end. Free speech is for people, not corporations. If Americans must rely on private corporations to serve as rating agencies on which our economy depends, the fabrication of a theory of corporate, rather than human, speech rights must end.
Cross-posted at Free Speech For People.