The International Rating Game: An Analysis of the Liability of Rating Agencies in Europe, England, and the United States

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I. INTRODUCTION

In the business of debt and securities rating, the reliability of the agency rating is all important. Of the numerous rating agencies which exist,(1) only a hallowed few have a reputation for virtually unabridged reliability. But even these agencies make mistakes.(2) The largest of these have begun to branch out into the international financial markets as the companies they rate explore an increasingly global economy. Coupled with the international expansion of rating agencies and a growing potential for mistakes in foreign venues come disparate classes of liability in different jurisdictions.

The globalization of national economies and the resulting development of international financial rating services is, in part, brought about by ever-increasing economic and political activity within the recently completed European Economic Area and border-free European Community,(3) as well as boom economies in the so-called "little dragons" of east Asia. In contributing to the discussion of economic globalization, we address the legal relationships between and the accountability of corporate raters to those rated and those who rely upon ratings and other kinds of rating agency communication. We take as our focus in this Article certain European Community jurisdictions and the United States not simply because they may be the venues for rating contracts and the sites where debt and securities rating liabilities will be determined, but further because the legal systems on both sides of the Atlantic will play a major role in influencing rating contracts and future liabilities of raters in Europe, America, and the world.(4)

In establishing what the liabilities of rating agencies are and where those liabilities might expand, we look primarily at the duty of care of debt raters in England and the United States in two settings. First, we deal with a rating agency's duty of care to use reasonable skill where there is no contract with the injured party. Secondly, we look at possible defamation liability and defenses of rating agencies who falsely underrate the creditworthiness or securities offering of a company. In addition, we touch upon government influence over rating agencies in France and rating agency liability generally in Germany.(5)

A. The Business of Rating

Rating agencies are, simply put, predictors of a company's or even a government's ability to meet the financial obligations of its debt and its bond issues as they accrue. An agency's rating performs, according to one rater's definition, the isolated task of "credit risk evaluation."(6) In reality, the effect and influence of both the rater and its rating go far beyond this modest suggestion.

Rating agencies rate everything from corporate public utilities and multinational corporations to municipal issuers and national governments as well as both foreign and English companies. Raters seek to remain independent from these issuers by refraining from direct investment in the companies they rate. The securities issuers sell bonds with varying degrees of security pledges and seniority and issue debt that is insured, structured, or otherwise complex. In the words of one rater, the rating of these varied types of debt and debt instruments provides "a single scale to compare among this array of different debt instruments."(7)

In the case of American and British raters, rating agencies operate with no governmental mandate, subpoena powers or official authority. In France, the situation is somewhat different.(8) Raters consider themselves, at least in the case of the large American agencies, to be members of the media and thereby shielded from the usual liabilities, such as libel, by the substantial protections of the First Amendment.(9)

Ratings, or credit risk evaluations, appear most often in the form of letter and/or number symbols.(10) From the rating agency perspective, a rating should be only one in a number of factors in the formation of an investment decision. …