On Monday, Standard & Poor’s, the world's top credit ratings agency told
a court that investors were fools to believe its promise to
objectively rate securities, when it admitted the claim was mere “puffery”
- - in effect as worthless as the bullshit from a used-car salesman.
The US government is seeking $5bn in penalties from S&P for giving high
ratings to risky securities where S&P was effectively
working on behalf of the issuers.
US District Judge David O. Carter for the Central District of California in
Santa Ana tentatively rejected S&P’s bid to dismiss outright the federal
government’s lawsuit but cautioned that he would make a final ruling by July 15.
The Wall Street Journal says lawyers for the company have highlighted
previous legal rulings that statements about the independence and objectivity of
S&P’s ratings were “mere puffery” and weren’t meant to be taken at face value by
investors. That means the statements can’t be the basis for a fraud lawsuit,
S&P’s lawyers argued.
“As of April, S&P’s legal argument, their legal argument, was that nobody could
reasonably think that they had a reputation for producing independent and
credible ratings,” Senator Al Franken said at a roundtable held by the
Securities and Exchange Commission (SEC) in May to discuss potential regulatory
changes to the credit-rating industry.
In a recent court filing by both parties on June 24, lawyers for S&P didn’t use
the word puffery. In S&P’s April 22 request to dismiss the case, lawyers for
the company used the word “puffery” three times in the 21-page filing.
A
federal judge last month in a related case, limited the extent to which
Fabrice Tourre, a former employee of Goldman Sachs, the investment bank, could
argue that he was acting on the advice of company lawyers in his defense against
charges that he misled investors.
The ruling could be another setback for Tourre ahead of his trial on July 15,
after the judge earlier in June rejected his argument that the SEC should narrow
its case against him. The government accuses Tourre of failing to tell investors
in a collateralized debt obligation (CDO) known as Abacus that hedge fund
Paulson & Co had helped choose the underlying mortgages and then bet against it.
Finfacts
reported in 2010 that the SEC had charged Goldman Sachs with fraud and that
GS recognized that market conditions were presenting challenges to the
successful marketing of CDO transactions backed by mortgage-related securities.
For example, portions of an email in French and English sent by Tourre to a
friend on January 23, 2007 stated, in English translation where applicable:
"More and more leverage in the system, The whole building is about to collapse
anytime now...Only potential survivor, the fabulous Fab[rice Tourre] ...
standing in the middle of all these complex, highly leveraged, exotic trades he
created without necessarily understanding all of the implications of those
monstruosities!!! (sic)"
The US government is trying to strip ratings from the legal code so that its
financial decisions won’t rely on them. However, ratings will continue to be
used.
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