Credit ratings are not always protected opinion under the First Amendment, according to a federal judge's decision in New Mexico. The November 12, 2011 decision is a win for investors who lost money on mortgage-backed securities and a defeat for credit rating agencies who regularly invoke First Amendment free speech protection to defend against lawsuits over their ratings.
In Genesee County Employees' Retirement System et al v. Thornburg Mortgage Securities Trust 2006-3 et al, U.S. District Court, District of New Mexico, No. 09-00300, the rating agencies argued that the Constitution protected them from claims they issued inflated ratings on more than $5 billion of securities issued in 2006 and 2007 and backed by loans from former Thornburg Mortgage Inc and other lenders. The court rejected the rating agency defendants' arguments that the First Amendment provides any protection to them under the facts of this case on the basis that the ratings were shared with too small a group of investors to deserve the broad protection sought.
For further information on the case please read this Reuters report by Jonathan Stempel
Standard & Poors has come under criticism over the years. Examples include having rated Executive Life Insurance Company paper AAA until January 1990, despite its massive junk bond holdings. The company collapsed a little more than a year later. S&P lowered its rating on Lehman Brothers from A+ to A in June 2008, just 3 months before Lehman filed for bankruptcy on September 15, 2008.