S&P raises puffery defense at U.S. case’s first court test

Standard & Poor’s, at the first court hearing over the U.S. government’s claims that the rating service defrauded investors, argued reasonable investors wouldn’t have relied on its “puffery” about credit ratings.

John Keker, a lawyer for the McGraw Hill Financial Inc. unit, today told U.S. District Judge David Carter in Santa Ana, California, that S&P’s generic statements about its business aspirations weren’t material to the banks buying securities and didn’t meaningfully change the mix of information available to investors.

“They’re seeking to blame the entire financial crisis on Standard & Poor’s,” Keker said in court. “Those generic statements don’t make a scheme to defraud. For a scheme to defraud, there has to be a specific intent to harm the victim, in this case the investor.”

Keker asked Carter to dismiss the government’s case, which seeks as much as $5 billion in civil penalties, on the grounds that the Justice Department didn’t adequately support its allegations that the company defrauded federally insured financial institutions by knowingly understating the credit risks of securities linked to residential mortgages.

Carter heard arguments from both sides and adjourned the hearing until 3 p.m. local time. He said he will give the parties a tentative ruling they can discuss in the afternoon.

Reasonable Investor

S&P said in its request to dismiss the case that the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.

The company also urged the judge to take into account that the U.S. is pressing fraud claims “despite the fact that other rating agencies issued ratings identical to those of S&P on the same securities at issue, and despite the fact that its views were consistent with those of virtually every other market participant,” according to an April 22 filing.

“Where’s Moody’s?” Carter asked Assistant U.S. Attorney George Cardona, who represented the Justice Department at the hearing.

Cardona said the government had developed evidence against S&P in this case without indicating whether the U.S. had investigated Moody’s Investors Service as well. Keker said the only difference between S&P and Moody’s was that S&P had downgraded the U.S. credit rating.

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