A Matter of Opinion?

 

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July 19, 2009

By DAVID SEGAL

THERE will be admirers of Floyd Abrams, the most famous First Amendment lawyer in the country, who are surprised to learn that he represents a corporation widely regarded as Part of the Problem in the economic meltdown. These people are likely to have a passing familiarity with Mr. Abrams’s four-decade career and think of him as a tribune of free speech and a defender of underdogs.

Mr. Abrams has some advice for these admirers: Get over it.

“People sometimes have views of what side of issues I should be on that have little to do with reality,” he says. “I don’t spend my life simply working for the A.C.L.U.”

For much of the foreseeable future, the famous eloquence and pugnacity of this 73-year-old titan of the bar will serve Standard & Poor’s, the largest of the credit rating agencies. The company, along with its rivals, Moody’s and Fitch, stamped high grades on billions of dollars of debt that went septic as the housing market collapsed. The three have spent much of the last year explaining those grades and other mysteries, like why they gave the Wall Street equivalent of gold stars to the debt of a handful of companies, including Lehman Brothers before it went under and A.I.G. before its rescue.

Until a few months ago, overhauling the rating agencies looked like the proverbial low-hanging fruit of financial industry reform. But legislators have so far been unable or unwilling to truly take on the companies. Now, a number a plaintiff’s lawyers are about to try their luck in court.

Actually, many courts. Dozens of investors have filed lawsuits seeking redress from the rating agencies, contending that the companies bear responsibility for investors’ losses, under a Whitman’s sampler of theories. The recession, in other words, is about to begin its litigation phase, and Mr. Abrams and a handful of partners at the law firm of Cahill Gordon & Reindel are readying defenses for more than 30 suits filed against S.& P. Up first, an oral argument on a motion to dismiss one case is set for July 31.

What is this veteran of free-speech battles doing on the payroll of a company that analyzes securities?

Making an argument about the First Amendment, to begin with. Mr. Abrams will contend that S.& P.’s ratings deserve exactly the sort of free-speech protections afforded to journalists, on the theory that a bond rating is like an editorial – an opinion based on an educated guess about the future. And for the same reason you can’t sue editorial writers, Mr. Abrams will argue that you can’t sue a bond rater because the economy went into a free fall that few saw coming.

“It shouldn’t change the legal dynamics that rating agencies are more important, or play a greater role, or are looked to by this or that element of the marketplace,” he says. “The major similarity here is that both the newspaper and S.& P. are offering opinions on matters that people can and do disagree about.”

Legal scholars give this argument marks that range from “certainly plausible” to “you’re kidding, right?” But Mr. Abrams won’t just be talking about free speech. The First Amendment is no defense against fraud, and that is what is alleged by many of the plaintiffs. Against them, Mr. Abrams will argue that S.& P. was every bit as blindsided as nearly everyone else in the private sector and in the regulatory sphere.

It’s obviously true, he will tell judges and juries, that many of the ratings “didn’t pan out,” as he puts it, but that doesn’t mean the company is liable for investor losses.

Variations of these arguments have worked for S.& P. in the past. In fact, aside from a small settlement in an Orange County, Calif., case 10 years ago, no litigant has wrested even token sums from S.& P. Which means that today, the company stands roughly where the tobacco companies stood in the mid-1990s: unpopular in public, virtually undefeated in court.

The fortunes of Big Tobacco, you might recall, changed substantially for the worse as more people came to believe that cigarette makers had misrepresented the dangers of their products. Ultimately, four tobacco companies settled for more than $200 billion with 46 attorneys general and today are heavily regulated by the government.

Mr. Abrams’s goal isn’t just to prevent a similar defeat, or to beat back litigants using the weapons he’s been wielding since the late ’60s. He wants more than that.

“Look, for the client’s interest, I very much hope that we can get rid of these litigations on motions for dismissal,” he says. “But from a personal point of view, I look forward to the chance to defend them against those charges in court. If we have a real trial, people would say terrible things about them and I would be very happy to show that those things aren’t so.”

It takes a moment to realize what Mr. Abrams is saying here: he doesn’t simply want to defend the ratings of S.& P. He wants to rehabilitate their reputation. The word “quixotic” doesn’t seem to capture how quixotic this sounds.

That said, were he to succeed, his S.& P. work would rank with any other odds-beating moment of his life. It would deserve its own chapter in the biography, would it not?

We pose this question, and Mr. Abrams thinks it over for a moment. Then he grins like a man who has just placed a huge roulette bet and is eager for the wheel to start spinning.

“We’ll see,” he says.

THE meltdown has thus far been cast as a scandal about Wall Street bankers, mortgage pros and lax regulators, but there is hardly a step along the path from real estate appraisal to securitized debt offering that didn’t involve lawyers. They were involved in structuring transactions, writing contracts, reading contracts, compliance, lobbying, and on and on.

“You can’t have a financial calamity without lawyers,” says George M. Cohen, a professor at the University of Virginia School of Law. “You need them to issue an opinion that a certain trading strategy is O.K., even if it might be really questionable. That can be invaluable to an investment bank. The lawyers say, ‘This is all right; everybody is doing it.’ And you’re off to the races.”

It would be silly, however, to expect lawyers who work for Wall Street to acknowledge errors by their employers. From the foot soldiers – who in the case of S.& P., were keeping i’s dotted on those bond ratings – to the generals, who, like Mr. Abrams, are devising and executing legal strategies, lawyers are paid handsomely for their unconditional love.

There is also, of course, a long and noble tradition of legal advocacy in the United States, and lawyers are expected and required to vigorously defend their clients, regardless of outside opinion or the views of naysayers. They’re supposed to be true believers. And if Mr. Abrams were representing you, it’s likely that you’d find his yield-nothing approach very appealing.

When it comes to S.& P., he doesn’t utter the word “regrets” – which S.& P. bigwigs tend to volunteer these days. In two hours of interviews in his office one recent afternoon, about the closest that he will come to suggesting that anything went haywire at S.& P. is this: “Assumptions were made and with respect to a portion of securitized ratings, the assumptions didn’t work.”

Sitting behind a huge desk in a corner office, dressed in a light blue Oxford shirt and a blue tie, he seems most comfortable discussing the finer points of law. Even now, in the senior-discount stage of his life, he gives the impression of a man fit enough to put you in a headlock, though he also seems too well mannered for fisticuffs. He answers questions deliberately, like one accustomed to having his words read back in a transcript. As he speaks, he slowly moves his coffee cup from a spot on his desk to a perch on a small stack of Post-it notes, then back to his desk, then back to the Post-its, over and over.

Mr. Abrams has worked for a mix of corporate clients that has included A.I.G. (before its near collapse), Reynolds Tobacco and, for about 20 years, McGraw-Hill, which owns S.& P. But media cases have made him the only First Amendment lawyer whom anyone outside the legal field can name. (He is representing a New York Times reporter who was called before a grand jury, but he’s no longer the paper’s go-to counsel, he says, because his price is too high.)

He became nationally known in 1971, at the age of 34, after he beat back the Nixon administration when it tried to block The Times’s series about a lengthy, secret account of the Vietnam War that had been drafted by the Pentagon. The Pentagon Papers case, as it was known, arrived at a moment in history when the rights of journalists – to protect sources, to publish classified documents, and so on – were flimsy at best, and by helping to make those rights robust, he became a media darling.

He would go on to defend clients like the Brooklyn Museum, which Rudolph W. Giuliani, then the mayor of New York, tried to shut down in 1999 because he found a piece of art in it offensive. Such fights have given Mr. Abrams the aura of a public-interest lawyer at large, an eminence who knows how to use the Constitution to deflect bullies.

There are legends in any field who coast on the fumes of early victories, but Mr. Abrams isn’t one of them, say law professors and fellow lawyers. He is still known for his don’t-give-an-inch approach to advocacy. In the rating agency field, that has earned him some critics.

“In my view, he hasn’t done the industry much good because his tactics have been too aggressive,” says Jerome S. Fons, a former Moody’s managing director. Mr. Fons has an example in mind: in 2004, the S.E.C. proposed a voluntary regulatory framework for the rating agencies. It never got much past the conceptual phase, and whatever it might have ultimately looked like, there’s little reason to think it would have defused the planet-rattling bomb that rating agencies were helping to ignite in 2004. But Mr. Fons says he thinks that at minimum, the framework could have “raised some red flags earlier,” and if that had happened, who knows?

“We told the commission that Moody’s was interested, but before we knew it the whole thing was derailed,” Mr. Fons says. “We were told that Floyd Abrams took a very dim view and without him, it didn’t have a chance.”

Mr. Abrams says he was actually a fan of the 2004 framework, and says it died because the commission lost interest. (A spokesman for the S.E.C. would not comment.)

But Mr. Abrams pleads guilty to the accusation of aggressiveness. He notes that he has filed for motions to dismiss in every case brought against S.& P., and he has taken what he describes as “expansive positions” about the scope of the First Amendment. Still, in his estimation, neither he nor S.& P. has anything to apologize for. Then again, nobody has asked for an apology.

“I haven’t had any personal criticism, no eyebrows raised, no how-could-you’s,” says Mr. Abrams of his S.& P. work. “There might have been a stray curse or two directed at the rating agencies in general, but no personal attacks.”

ATTACKS on his client, on the other hand, have been almost nonstop since the market went south. Like its competitors, S.& P. is paid by the issuers of the bonds it assesses, setting up what appears to be a rather spectacular conflict of interest – like a teacher appraising the work of the students who pay his salary. To detractors, that apparent conflict explains why so many bonds that were later all but worthless were stamped triple-A. It might also explain the now-infamous back and forth of instant messages between two S.& P. analysts, one of whom says the firm’s risk assessment model hasn’t captured half the risk of a particular deal.

“It could be structured by cows,” the analyst wrote, “and we’d rate it.”

Mr. Abrams has made First Amendment claims on S.& P.’s behalf when litigants have requested the firm’s files for lawsuits against underwriters. (Company X sues Company Y, for instance, and wants S.& P. documents for the case.) There have also been victories by rating agencies contending that free-speech protections shield them from lawsuits brought by plaintiffs who say, in effect, “If you hadn’t given a triple-A to this bond, I never would have bought it.” But some legal experts say that this defense is hardly a sure-fire winner.

“I don’t think it’s a good legal argument, though there might be some courts that buy it,” says John C. Coffee, a law professor at Columbia. “I don’t think that a rating is the same as an editorial, because The New York Times’s editorial page isn’t paid for by a sponsor. The direct, commercial relationship of the issuer of the bond and the rating agency puts it into the field of commercial speech.”

Generally, commercial speech isn’t accorded the same high level of protections given to journalists. There are potential legal repercussions, for instance, when a doctor gives a medical opinion that turns out to be wrong, says Rodney A. Smolla, dean of the Washington and Lee University School of Law.

“There’s no question that the rating agencies are entitled to some level of First Amendment protection,” he says. “What’s harder to figure out is what degree of regulation we can impose on the companies. There are millions who rely on the objectivity of those ratings, and if you could prove that those ratings were corrupted by a bribe or tainted by a clear conflict of interest, my view is that those protections would be reduced or eliminated entirely.”

Suits alleging fraud against S.& P. present other complications. Mr. Abrams maintains that the law protects S.& P. and its judgments about the future as long as analysts at the company truly believe the ratings they come up with. “Even if those ratings are wrong, or the company did a lousy job, you can’t bring a lawsuit against someone for offering forward-looking predictions,” he says.

He returns to the editorial-writer analogy, though he has others. You can’t sue economists, he says, or meteorologists.

But there are some differences between a weather forecaster and an S.& P. analyst, and lawyers for the plaintiffs in these cases are sure to point them out. There is little chance that a meteorologist has a financial stake in saying, “It’s going to be sunny.” The rating agencies, on the other hand, essentially get paid by the people who need a prediction of clear skies, and the customers can always ask a different forecaster if they don’t hear what they like.

And all sorts of financial institutions are required by law to rely on ratings. (For instance, there are plenty of money market funds that can’t buy bonds unless rated triple-A.) That elevates the commercial importance of those ratings, which gives them a different legal status than, say, a weather report.

The rating agencies aren’t waiting for detractors to argue such distinctions. They have lately been emphasizing the changes they have undertaken voluntarily in recent months. In an interview with public relations executives at McGraw-Hill last week, and in an advertorial that ran in newspapers on Thursday, there was talk about changes that would make the calculations behind ratings more transparent and new steps to mitigate the potential for conflicts of interest.

“This is already a different business than it was two years ago,” says Ted Smyth, who runs McGraw-Hill’s corporate affairs.

But fundamental reforms aren’t on the table, and the changes that are might be like sending diplomats to a country you’ve inadvertently nuked. On Tuesday, one of the largest American pension funds, Calpers, filed suit against all three rating agencies, alleging that “wildly inaccurate” ratings had led to $1 billion in losses. The fund had bought structured investment vehicles, a package of securities that include subprime mortgages, which had been given high ratings before all but evaporating last year. The rating agencies, according to the suit, used methods that “were seriously flawed in conception and incompetently applied.”

And S.& P. isn’t taking fire just from executive suites. By coincidence, on the day of the interview with Mr. Abrams, a noisy protest was staged in front of the company’s office in the financial district of Manhattan. About 100 tenants who live in apartment buildings with affordable-housing units walked in a circle, banging on drums, waving signs and chanting “Investigate before you rate!”

A spokesman for the Association for Neighborhood and Housing Development, which led the protest, explained that it wanted S.& P. to know that it was helping real estate developers engage in what it called “predatory equity” – the practice of buying buildings filled with poor tenants and then using legal tactics to scare them out, so that higher rents can be charged to wealthier renters. The group had already picketed a building owner. Now, because S.& P. had rated some of the deals, it was S.& P.’s turn.

“Our beef is that thousands of tenants have lost their affordable housing because of the pressure of speculative investments that was enabled and encouraged by S.& P. and the other rating agencies,” said Benjamin Dulchin, the group’s executive director. “And that has to stop.”

A year ago, no one would have included a rating agency in a list of picket-worthy institutions, and as the tobacco companies learned, the public image of a corporation can have a huge impact on its fate in court. The sheer quantity of litigation against the rating agencies has exploded, too; the number of cases now pending against S.& P. for ratings-related work is about three times the total number it has faced in the past. Tens of billions are at stake.

NATURALLY, Mr. Abrams is undaunted by S.& P.’s sudden vogue as a bad guy. First Amendment lawyers have a long and storied history of defending speech, by individuals and groups like pornographers and the Ku Klux Klan. Floyd Abrams, as it happens, has never represented a hate group or the publisher of a dirty magazine.

And to those who would lump S.& P. into any group of reviled organizations in need of a good lawyer, Mr. Abrams says the company is actually misunderstood.

“If any of these cases go to trial,” he says, “I welcome the opportunity to demonstrate that S.& P. sometimes has gotten a truly unjustifiable bad rap.”