23 April 2013

S&P Says Its Claims to Honest Objectivity and Independence Were 'Puffery'

"There was a young man who had an aged father and mother who owned considerable property. The young man, being an only son, and believing that the old people had outlived their usefulness, killed them both. He was accused, tried and convicted of murder.

When the judge came to pass sentence upon him, he called on him to give any reason why the severest sentence should not be passed.  The young man promptly replied that he hoped the court would be lenient because he was an orphan."

Abraham Lincoln

Puffery, for those unacquainted with the technical term, is a euphemism concocted by the legal profession.  It means untruth in advertising.
"Puffery as a legal term refers to promotional statements and claims that express subjective rather than objective views, which no "reasonable person" would take literally. Puffery serves to "puff up" an exaggerated image of what is being described and is especially featured in testimonials."
It is one thing to apply it to some advert on television, that it is puffery to say that this person thinks our detergent cleans best. It may be quite another thing to state that when a firm claims to offer objective and honest advice, which is why the customer is buying it in the first place, that is mere 'puffery.'

When the truth becomes tortured enough, the rationalizations for failure and even deception become increasingly bizarre.

There is the CEO defense: I wasn't really involved in the things for which I received huge sums of money.

There is the bureaucratic defense: We didn't know because we didn't see it.

And now we have the ratings agency defense: It can't be fraud, because everyone knows we are not objective and independent, even though we say we are and sell our services based on that claim.

This isn't all that far from that venerable Wall Street defenses so often trotted out after a stock bubble and fraud collapses:  Well, no one made them give us their money and  Everyone was doing it and Everyone knows the game is rigged.

These are tales from the schoolyard.  This is the credibility trap.

S&P Has Unusual Defense
By Jeanette Neumann
April 22, 2013, 3:00 p.m. ET

Standard & Poor's Ratings Services has long declared that its letter-grade ratings are independent and objective, part of a bid to allay concerns over its business model...

Now, lawyers defending the company against the Justice Department's recent civil lawsuit say that statements about independence and objectivity are "puffery" and were never meant to be taken at face value by investors...

The federal government says that the rating firm committed fraud when it allegedly misrepresented its ratings as independent and objective.

"Even if it's a viable legal argument, it's a pretty unattractive argument for S&P to be putting forward since they're basically in the business of charging clients for their reputation," said Samuel Buell, a law professor at Duke University and a former federal prosecutor. "What they're saying here is, 'When we're talking to investors about our own reputation, we're engaging in meaningless puffery.' "

Read the remarkable story here.