Re: 1/22/03 - [CPWR] Reuters: Compuware sues Moody's for alleged defamation
Reuters
Compuware sues Moody's for alleged defamation
Wednesday January 22, 5:35 pm ET
By Jonathan Stempel
NEW YORK, Jan 22 (Reuters) - Compuware Corp. (NasdaqNM:CPWR - News) has sued Moody's Investors Service, alleging that the credit rating agency's decision last August to downgrade the company to "junk" status, which caused its shares to fall 16 percent, constitutes defamation.
Compuware, a Farmington Hills, Michigan-based software maker, filed suit on Tuesday in a federal district court in Detroit, also alleging breach of contract, fraud and securities law violations. The suit seeks punitive damages and the return of $245,000 that Compuware said it paid Moody's, a unit of Moody's Corp. (NYSE:MCO - News), for ratings.
Rating agencies have faced intense scrutiny after being faulted for not downgrading Enron Corp. (Other OTC:ENRNQ.PK - News) fast enough once the energy trader's problems became obvious. Congress and the U.S. Securities and Exchange Commission last year held hearings on possible reforms.
Jonathan Macey, a Cornell Law School professor who testified about the agencies' role in Enron to the U.S. Senate and said he is "not a huge fan of rating agencies," said Compuware faces an uphill court fight.
"As a matter of law and policy, it is unlikely that Compuware will succeed, or should succeed," he said. "Absent allegations that Moody's acted for personal benefit or acted with malice in imposing the downgrade, I can't imagine how this lawsuit could survive a motion to dismiss."
Moody's on Aug. 13, 2002 cut Compuware's issuer and senior bank facility ratings two notches to "Ba1," its highest junk grade, from "Baa2," with a "negative" outlook.
It cited weak revenues and profits, a tough environment for software and information technology services, and litigation with International Business Machines Corp. (NYSE:IBM - News).
Lower ratings often boost borrowing costs and force investors not allowed to own junk-rated debt to sell. Moody's did not immediately return calls seeking comment.
"RECKLESS DISREGARD" ALLEGED
In its complaint, Compuware alleged: "Moody's published the statements with knowledge of their untruth or reckless disregard for the truth of the statements and without any justification."
Compuware last year cut more than 1,500 employees, or about 13 percent of its work force, in a reorganization primarily affecting its professional services business.
The company late Wednesday posted fiscal third quarter net income of $25.4 million, or 7 cents per share, down from $29.8 million a year ago, as U.S. companies spent less and the technology sector sagged. Analysts polled by Thomson First Call expected a per-share profit of 8 cents. Quarterly revenue fell to $333.1 million from $453.8 million a year ago.
Compuware shares closed Wednesday on the Nasdaq at $3.91, down 8 cents. They fell 50 cents, or 16.3 percent, to $2.56 on Aug. 13. The Nasdaq fell 2.9 percent that day.
FIRST AMENDMENT
Alan Bromberg, a securities law professor at Southern Methodist University in Dallas, said Moody's, as it has done in similar suits, might raise a First Amendment defense that in downgrading Compuware it was performing a public service, and that its cut constituted protected opinion.
"The issue would likely be whether Moody's had a reasonable basis for the downgrade, and did a craftsmanlike job," he said. "For there to be any securities violation, a company would have to show an intent to injure, which is a very difficult point to prove absent inside information from Moody's that suggested a plot to hurt the company."
Macey added: "We don't regularly see success against rating agencies on these kinds of suits, especially should the agencies articulate plausible reasons for their downgrades."
Compuware said that at the time of the downgrade it had more than $475 million of cash and no long-term debt, and expected to generate free cash flow in its 2003 fiscal year.
It alleged that Moody's representation that Compuware's creditworthiness was "less than a company such as Computer Associates (NYSE:CA - News) and similar companies" implied that Moody's possessed facts suggesting that Compuware's financials could not be trusted, or that the company acted unethically.
"Moody's false and defamatory statements impugn Compuware's business, its ability to do business, its methods of doing business, its credit and its honesty and therefore constitute libel per se," Compuware said.
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