When ethics is more than parsley on the legal plate

In a case (previously featured in this blog) that the Department of Justice recently brought  against S&P and its corporate parent McGraw-Hill based  in part on S&P’s allegedly false claims that its ratings of certain financial instruments were free of COIs, the defendants last week  filed a motion to dismiss on the grounds (among others) that such claims of ethicality were mere “puffery.”    Readers of this blog may recall a case last year (involving Goldman Sachs) also based on allegations of false professions of ethicality in which a judge rejected a puffery defense, calling it “Orwellian.”  On the other hand, S&P/McGraw-Hill has recently prevailed on a puffery defense in an lawsuit based on its ratings.

The court’s decision on the instant motion will, of course, be driven both by prior precedents (presumably those mentioned above and others) and also the specifics of the alleged operative facts, and other commentators will do a better job of dealing with these than the COI Blog could.  So instead, I want to use this occasion to consider the broader issue of whether false claims of ethicality should, at least in some instances, be legally actionable,  as S&P’s defense seems to suggest should never be the case.

To begin, the basic concept of a puffery defense is certainly logical, as one wouldn’t want every sales or marketing related exaggeration to be grounds for a lawsuit.  Mike’s Coffee House should be spared an onslaught of litigation from customers if its claim of serving “the best coffee in the world” is something of a “stretcher.”  The common-sense issue in all puffery cases is whether a false claim can reasonably be said to make a difference to a buyer and while the ethicist in me dreams of the day when ethics is a significant part of every commercial decision my lawyer self knows that that day hasn’t arrived (and probably never will).

Indeed, from a purely economic perspective, in many commercial settings, an ethics-related “stretcher” – while ethically deplorable – should not give rise to a lawsuit.  If you buy a widget from a manufacturer that makes vague and false pronouncements of being an ethical company, the courts presumably will not order that damages be paid to you – because the widget is likely no less valuable due to the falsity of the proclamations.  Moreover, making all false claims about ethics legally actionable could have the undesirable consequence of making companies less eager to speak publicly about their ethical efforts.

But then there are cases where the claim of ethicality is not – from an economic perspective – mere parsley on the plate, but is baked into the actual meal.   And – again, without knowing what the evidence in the S&P case will be – it certainly seems possible that a ratings agency’s allegedly falsely claims that it has addressed conflicts of interest in its ratings would fall into that category, given a) how essential independence is to making a rating valid and b) the industry’s troublesome history in ensuring that its ratings are actually conflicts free.  That is, unlike the hypothetical widget case, the user of credit ratings would presumably have zero commercial interest in a product tainted by conflicts of interest.

A final point from a historical perspective, which is that while there was a time when little beyond good intentions was expected of an organization claiming to be ethical that has changed in recent years.  Owing in part to the Federal Sentencing Guidelines for Organizations and their progeny – as discussed here – companies are now expected to have effective policies, procedures, resources and accountabilities to support their good intentions.  In determining what the users of S&P’s ratings could reasonably expect from that organization’s professions of ethicality one hopes that the court will take that important development into account.

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