The rating agencies are not entitled to First Amendment protection for their ratings of securities backed by mortgages originated at defunct Thornburg Mortgage, a federal judge has ruled. In a massive 273-page November 12, 2011 opinion that addresses a number of issues involved with the defendants motions’ to dismiss the securities class action lawsuit filed on behalf of the purchases of the Thornburg Mortgage Pass-Through Certificates, District of New Mexico Judge James Browning held that though the rating agencies’ ratings represent opinion,  the First Amendment does not protect the rating agencies opinion, due to the characteristics of the securities offerings involved.


A copy of Judge Browining’s opinion can be found here. Nate Raymond first reported on the opinion in his November 23, 2011 Am Law Litigation Daily article (here).


As discussed at greater length here, the plaintiffs first filed their lawsuit in March 2009, alleging that the documents prepared in connection with initial offering of the securities contained material misrepresentations and omissions. The plaintiffs alleged that they did not accurately disclose the practices involved with the origination of the mortgages underlying the securities. The defendants included the investment banking firms involved with the issuance, underwriting and distribution of the securities. The defendants also included a number of individuals who signed the registration statements. The plaintiffs also sued the rating agencies that had provided ratings of the securities in connection with the offerings. The defendants moved to dismiss.


In his lengthy November 12 opinion, Judge Browning granted in part and denied in part the defendants’ dismissal motions. With respect to the credit rating agencies, Judge Browning held that the plaintiffs have sufficiently pled allegations about material misrepresentations or omissions with respect to McGraw-Hill Companies and Standard & Poor’s Rating Services, but not against Fitch; Fitch Ratings; Moody’s Corp.; or Moody’s Investor Services.


Judge Browning also held that the First Amendment does not bar the plaintiffs’ claims against the rating agency defendants. In holding that the First Amendment does not protect the rating agencies opinions (at pages 228 through 235 of the opinion), Judge Browning among other things determined that the ratings did not address a matter of public concern. In reaching this conclusion, Judge Browning noted that plaintiffs had not alleged that the rating agency defendants “ever published their ratings to the public at large”; to the contrary, the plaintiffs’ alleged the ratings appeared only in the offering documents, which were “specifically targeted institutional investors for the investments.”


Judge Browning also noted that “the ratings related to statutory trusts, and not publicly traded companies, which would qualify as public figures.” The ratings “impacted only the limited group of investors who received the offering documents, the Thornburg trusts, and the companies involved with those Thornburg trusts, as opposed to the public at large.” 


Judge Browning said that the “general public’s interest in the free flow of advertising” is “distinguishable” from “providing credit ratings in offering documents given to a select group rather than the public at large.”


Though Judge Browning concluded that the plaintiffs’ allegations against certain of the rating agency defendants were sufficient to state a claim under New Mexico’s blue sky laws, he also found that the plaintiffs had not met jurisdictional requirement for the statute to apply. He allowed the plaintiffs’ leave to amend their complaint in order to s the show that the securities involved had been sold in the state.


Judge Browning is not the first to rule that the rating agencies’ ratings are not protected by the First Amendment, at least under the facts at issue. Indeed, Judge Browning cited and quoted from Judge Shira Scheindlin’s September 2009 in the Cheyne Financial case (about which refer here). In addition, a California state court judge ruled in an action against the rating agencies brought by Calpers that the rating agencies were not entitled to First Amendment protection (refer here).


Judge Browning’s opinion may nevertheless represent something of a breakthrough, because it is, according to the plaintiffs’ attorney quoted in the Am Law Litigation Daily article linked above, the first holding in a class action lawsuit that the rating agencies were not entitled to First Amendment protection.


But while the ruling may be, as the plaintiffs’ lawyer is quoted as saying the article, “groundbreaking,” this developing body of case law may not control the analysis in many contexts. Like Judge Scheindlin in the Cheyne Financial case, who held that the First Amendment does not apply when a rating agency disseminates ratings to a select group of investors and not the public at large, Judge Browning found it determinative of the issues that the ratings at issue appeared in documents that were distributed only to institutional investors and did not involve publicly traded companies.


These rulings still allow the rating agencies room to argue that their ratings are entitled to First Amendment protection where the ratings were distributed to a broader audience, involve publicly traded companies or otherwise involve matters of public interest. But thought the holdings in these cases have limitations, they nevertheless represent a growing body of case law that circumscribes limitations in rating agencies’ assertions of First Amendment defenses. 


Am I the Only One Who Worries About What Black Friday Says About Us as a Society?: From the front page of the Cleveland Plain Dealer, Saturday, November 26, 2011: “At Westfield SouthPark mall, police were called to Victoria’s Secret at 4:05 a.m. – five minutes after opening – to what a police report called a ‘riot.’”