Standard & Poor's, facing up to $5 billion in civil damages on charges of knowingly understating the credit risks of mortgage backed securities, is offering a novel defense—no reasonable investor would have taken S&P's claims about its own objectivity seriously.
It's a multi-pronged case, but one key issue is how we should understand the legal status of S&P's claims to offer independent, objective credit ratings that are free of conflicts of interest. The Department of Justice's view is that those are meaningful claims, and that evidence suggests they are false claims. Rather than offering independent objective ratings, the government charges, S&P offered softball ratings to banks in order to gain their business. S&P counters that there's no liability here. Its ratings are protected free speech and claims about objectivity are "puffery" rather than meaningful financial statements upon which a reasonable investor would rely.
The law is the law, but this line of defense simply underscores that these agencies deserve to die.