Fraud and Proof of Reliance

In fraud cases, the plaintiff must prove, among other things, that she reasonably relied on the factual assertion made by the defendant.

All too often blue chip defendants turn around and argue that no one could ever rely on what they said because the assertions were puffery or because the plaintiff should have understood they were not telling the truth. These arguments are inconsistent and contradict the institution's claim that it is a credible institution whose word is worthy of consideration. Sometimes courts accept these arguments.

Recently, in United States v. McGraw Hill Companies and Standard and Poors Financial Services, LLC, 2013 U.S. Dist. Lexis 99961, the district judge refused to accept these arguments.

The United States sued S&P for fraud, for giving high ratings to mortgage backed securities. The issuers of those mortgage backed securities would pay S&P to rate the issue. S&P would then evaluate the creditworthiness of the issue and announce a final grade.

Why did the United States sue? Because in the recent financial crisis, the government was often left holding the bag when mortgage-backed securities proved worthless.

SP's major defense was that its statements were "puffery." The district court correctly recognizes the inconsistency in this argument. SP was paid to provide credit ratings for bond and other securities. SP is one of three companies that have the qualifications to do this work. SP opinions are relied upon by tens of thousands of market participants every day.

The district court explains: "Defendants lead off with a proposition that is deeply and unavoidably troubling when you take a moment to consider its implications. They claim that, out of all the public statements that S&P made to investors, issuers, regulators and legislators regarding the company's procedures for providing objective, data-based credit ratings that were unaffected by potential conflicts of interest, not one statement should have been relied upon by investors, issuers, regulators, or legislators who needed to be able to count on objective, data-based credit ratings."  The district court correctly rejected this argument and denied the motion to dismiss.

Under the law, subjective claims about a product are puffery. Claims like this are puffery: "Prices will never again be this low!" or "This is the best car for the money!" "When you buy a car from us, we treat you like family!"

When SP informed market participants that a certain bond issue had a AAA rating, it was not engaging in puffery. SP was giving its informed opinion as the creditworthiness of the issuer. If it was not giving an informed opinion, why was it charging so much money for "puffery?"

SP is a blue chip institution that made some bad judgments that cost the taxpayers a great deal of money. Investors and others had the right to rely on the integrity of its opinions.

Edward X. Clinton, Jr.