Audit Integrity vs. Hertz, Round 2

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New York – In response to Hertz’s defamation suit, Audit Integrity filed a letter with the SEC requesting an investigation of Hertz’s alleged attempt to suppress independent research.  Whether or not the SEC takes heed, the move is a more effective response than a counter-suit.

Background

Audit Integrity released a new bankruptcy model a month ago  which adds corporate governance and fraud-related factors to the financial ratios included in standard bankruptcy models.  At the same time, Audit Integrity released the names of 20 firms which the new model indicated had “the highest probability of declaring bankruptcy among publicly traded firms with more than $1 billion market capitalizations.”  In addition to Hertz, the list included Macy’s, Rite Aid, CBS, AMR Corp and Continental Airlines (full list below).  Hertz responded with a lawsuit seeking unspecified financial damages, an apology with retraction and a court injunction barring Audit Integrity from making “further defamatory statements.”

Our Take

Legal experts generally believe that Hertz’s lawsuit is unlikely to be successful.  As long as Audit Integrity can demonstrate that they used facts to arrive at their opinions, their conclusions are protected by the First Amendment.  Nevertheless, the legal actions are burdensome on small firms such as Audit Integrity.  Past lawsuits by Overstock.com and Biovail against Gradient Analytics were not successful legally, but Gradient had large legal expenses defending its position and filing counter-suits.  Audit Integrity has wisely chosen not to counter-sue.  The threat of SEC investigation is a better deterrent to the other 19 firms which might be considering whether to join Hertz’s lawsuit.  The irony is that Gradient’s business thrived despite (or perhaps because of) the lawsuits, so Hertz’s lawsuit may yield positive results for Audit Integrity.  Certainly it has gotten way more PR for its new bankruptcy model than it ever expected.

To view Audit Integrity’s letter to the SEC, click here.

The 20 firms named as bankruptcy risks by Audit Integrity:

* Advanced Micro Devices, Inc.

* Amkor Technology, Inc.

* AMR Corporation

* Apartment Investment and Management Co.

* CBS Corporation

* Continental Airlines, Inc.

* Federal-Mogul Corporation

* Hertz Global Holdings, Inc.

* Interpublic Group of Companies, Inc.

* Las Vegas Sands Corp.

* Liberty Media Corporation (Capital)

* Macy’s, Inc.

* Oshkosh Corporation

* Redwood Trust, Inc.

* Rite Aid Corporation

* Sirius XM Radio Inc.

* Sprint Nextel Corporation

* Textron Inc.

* The Goodyear Tire & Rubber Company

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1 Comment

  1. I would concur that all analogous precedents on similar cases would indicate that Hertz cannot win this lawsuit. Mr. Zimmerman, Hertz’ counsel, must understand this to be the case. Ergo, Hertz must want something else – either an apology from Audit Integrity which seems unlikely – or to force Audit Integrity to spend so much money defending such a lawsuit as to jeopardize its viability.

    As you point out, by electing not to countersue and by asking the SEC to investigate attempted coercion instead, Audit Integrity seems to be minimizing its own financial risk. It will be interesting to see whether the SEC will, in truth, embark in such an investigation. If it does not do so, Ms. Schapiro will risk having her published statements in support of firms using independent research to corroborate or supplement Moody’s ratings dismissed as empty political promises-as-usual.

    Thank you for posting this column and calling attention to this issue.

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