S&P, by saying investors should not listen to its advice, is trying to have its cake and eat it too. Puffery, indeed!
S&P said in its request to dismiss the case that the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.
* * * * *
Cardona told the judge that S&P’s “puffing” about its ratings being independent and objective was material because the ratings were important in reassuring investors about the credit quality of the securities they bought from investment banks.
The ratings weren’t independent and objective because S&P let issuers influence its models and criteria, Cardona. The U.S. sued New York-based S&P on Feb. 4, alleging its credit ratings for residential mortgage-backed securities and collateralized-debt obligations that included those securities, contrary to what the company told investors, were based on a desire to win business from issuers of the securities more than on the credit risk of the investments.
The following rings true, however, which is a demonstration of why caveat emptor (buyer beware) is a better overall market policy:
S&P argued in its April 22 filing that it’s “ironic” that the government seeks penalties for losses by the same banks, Bank of America Corp. and Citigroup Inc. (C), that were creating and selling the CDOs. “The complaint charges S&P with intending to defraud these financial institutions about the likely performance of their own products,” the company said.