Re: Probing the S&P Probe

Kevin, the First Amendment has never been a source of much protection from prosecution. That's because our jurisprudence distinguishes the criminalizing of speech itself from the use of speech as evidence to prove other crimes. The former is very rare -- limited to things like unauthorized disclosures of classified information (the prosecution of which almost never happens). The latter is routine.

Most uses of speech as evidence involve circumstances no one would have a problem with. If boss tells button-man, "Whack him," I doubt many people would entertain boss's claim that he should not be prosecuted for conspiracy to murder because the First Amendment allows him to express himself. Where things get more complicated, though, is when criminal statutes are so vague that prosecutors are unleashed to investigate behavior (including speech) that offends their sensibilities as if it were criminal. In those circumstances, the useful distinction between criminalizing speech and merely using speech to prove conduct that is clearly criminal melts away. 

This is why, last year, the Supreme Court sharply limited the noxiously vague "honest services" fraud statute (18 U.S. Code, Sec. 1346). Prosecutors were using it whenever they detected any kind of potential deception or undisclosed self-dealing that seemed offensive to them but wasn't covered by a statute defining an obvious, concrete crime. Henceforth, the honest services theory applies only in fraud schemes that involve bribes or kickbacks. Those are readily understandable offenses, and if someone makes statements that are meant to carry out or cover up such schemes, I don't think there ought to be a First Amendment defense.

The problem here is that the S&P probe could be based on the discredited and now invalid "honest services" doctrine. If it is, that would be an abuse of power -- and that is a possibility that can't be dismissed given the current Justice Department's track record.

The SEC and DOJ also investigate securities fraud cases using a deception theory under Rule 10b-5 of the 1934 Securities Exchange Act. It is very broad, potentially punishing any person who, directly or indirectly, makes untrue statements of material fact (or makes material ommissions) or otherwise employs deceptive practices in connection with the purchase or sale of securities.

In such a case, you'd have to show the defendant was engaged in a deception rather than an honest error, that he had a duty to speak truthfully, and that he was actually involved in the purchase or sale of securities. The prosecution is almost never required to prove the defendant's motive, but I would think you'd have to show a rating agency had some powerful incentive to lie. Sounds like a very tough case to me, but I don't pretend to know the evidence or the theory behind the government's investigation. When such a fraud scheme can be shown, though, statements of opinion about the strength of securities are commonly used as evidence.

Bottom line: I don't think the use of speech as evidence is as problematic as the vagueness of the "crime" it is used to establish.