The litigation
exposure of the Big Four accounting firms has not been made easier. 

The global networks
should take no satisfaction from the field-leveling decision of Judge Jayne Jagot of the Federal Court of Australia, who on
November 5 found ratings agency Standard & Poor’s (S&P) negligently
liable to the purchasers of “grotesquely complicated” derivatives, designed and
sold by ABN Amro. 

Schadenfreude would be wrong – and not just because it’s
too hard to spell.

Consider the cries
for accountability, during the recent years of financial calamity, by the
auditors and the ratings agencies (e.g.,
here and here) – both of them, depending on one’s perspective, either vital
gate-keepers to the markets, or aiders and abettors of the malefactors.

When their roles
are compared, the guilty shiver of pleasure at another’s troubles would
under-estimate the potential spreading of exposure. Consider the similarities: 

• Both
  have come to be viewed as essential functions in the world’s capital raising –
  chiefly by their regulatory authorities, to whom self-preservation and
  continuing existence are their own primary raison
  d’être.   

• Both
  are engaged and paid by their clients, upon which direct financial relationship
  they construct an elaborate edifice in illusory support of the intellectually
  unsatisfactory concept of an “appearance of independence.”

• Both
  seek to advance credible arguments that there is legitimate competition in
  their sector, despite effective barriers to entry that maintain their pass-the-parcel
  hegemony and an ever-tightening dominance by their respective global cartels.

• Their
  core products – the standard audit report and the three-letter rating – are
  delivered to users in prescribed and commoditized language – of which the
  source is a matter of consumer indifference and authorship would not be obvious
  absent a letterhead. 

• And
  finally, both couch their language in the qualified language of “opinions” and
  “judgment. ”

As
to the last, however, the critical survivability difference emerges.

Namely, while
S&P and its brethren have succeeded in wrapping themselves in the fuzzy if heretofore
liability-proof blanket of the First Amendment’s free-speech protection, the
auditors have long skirted disaster at the hands of a hindsight jurisprudence
that threatens damages far beyond the limits of their financial tolerance or capacity. 

For the detail
geeks, ABN Amro’s eye-crossingly complex derivatives, code-named “Rembrandt,”
and the model-gaming involved in the rating process are laid out in
overwhelming detail in the summary of Judge Jagot’s massive decision, and are
thoroughly and colorfully discussed elsewhere – here and here.

The result
threatens to turn topsy-turvy the ratings agencies’ comfortably protected world.
Her Antipodean perspective is that S&P’s triple-A ratings were “misleading
and deceptive,” involved “publication of information or statements false in material
particulars,” and could not have been given by “a reasonably competent ratings
agency.

For the ratings
agencies themselves, the threat of worldwide contagion after the Rembrandt
decision may be mitigated by both the availability of continuing scorched-earth
defense strategies and the likely expiration of statutes of limitations to
shield them from crisis-era claims.

For the auditors, who
as noted are already far more exposed, it may be otherwise. Because — taking
cautionary note that the Rembrandt investor plaintiffs were supported by a
publicly-listed company whose business is the funding and financing of large-scale
class action securities litigation (here) – the investor-protection bar is a ruthlessly effective
learning organism – to which the Judge’s liability language will operate like a
blood-soaked invitation into a shark tank.

Even if not in the
already-fraught American litigation market, should her process of hindsight
negligence analysis gain traction in the courtrooms of Europe and elsewhere,
the large accounting firms will find no ready firewall against the spreading
conflagration.

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