This SLAPP Really Hertz

Auto-rental company Hertz, has recently involved itself in legal action against Audit Integrity (AI), a financial watchdog, for AIs recent research into the probability of bankruptcy filing by certain publicly traded corporations.

On September 15, 2009 AI, an independent financial research team, published The Audit Integrity Bankruptcy Risk Model: An Enhanced Approach to Predicting Bankruptcies and Identifying Companies in Severe Financial Distress. This “Bankruptcy White Paper” combines three economic models to analyse companies, with a market capitalisation of less than $1 billion, statistical probability of filing for bankruptcy in the coming year. Amongst the companies named, Hertz Global Holdings, Inc. was given a 3.99% chance of going belly up.

AI is no stranger to making waves in the Financial World. In 2008, using its Accounting and Governance Risk (AGR) model, it accurately predicted, several quarters in advance, grave losses for Lehman Brothers, Bank of America and Merrill Lynch. A data supplier for Forbes and Fidelity Investments, AI was created to develop risk management tools based on statistical analysis of corporate integrity. But now AI’s research has landed them in hot water with Hertz suing both the company and its CEO for defamation and trade libel.

In its complaint Hertz asserts that Audit Integrity defamed their company by publishing, and subsequently refusing to retract, false statements. Hertz claims that Audit Integrity acted “oppressively, fraudulently and maliciously,” with actual malice. As a direct result, Hertz argues it has “suffered damages – including loss of business reputation, loss of business goodwill, loss of customers, and loss of investors – in an amount not yet precisely ascertainable.” The Bankruptcy White Paper provides full details of its research, including a methodical break down of how it arrived at its conclusion and ranking system.

Hertz is also suing AI’s CEO, Jack Zwingli, based on an interview he conducted with CNBC’s Street Signs. Hertz claims that in the interview Mr. Zwingli did not object to or correct CNBC’s representation of the 20 companies. Hertz also claims that the appearance of their name on screen underneath the title “Next Chapter: Chapter 11?” leads observers to conclude that the next step for Hertz, and the 19 other companies, is filing for bankruptcy. In Mr. Zwingli’s interview, all 20 companies are shown under the “Next Chapter” title screen, and Hertz is one of the few companies not directly mentioned by the host.

Douglas A. McIntyre, Former Editor-in-Chief and Publisher of Financial World Magazine, in a posting on 24/7WallSt.com, argues it is ‘odd and ironic’ that Hertz would chose to sue Audit Integrity. Having reviewed Hertz’s 10-K filing with the SEC, he describes their list of risk factors as “nearly a mile long.” Seeking Alpha, the bi-continental blog which provides analysis and opinions on stocks, recently blogged that Hertz was on the “road to bankruptcy” but that it just completed “act worthy of Houdini.” Graham and Dodd cite four examples recently taken by Hertz to flex its financial strength, stating that these findings question the validity of Hertz’s argument.

Strategic Lawsuits Against Public Participation, referred to as SLAPP’s, are meritless lawsuits brought against those who speak out on issues of public interest. As the world’s largest rental car service, Hertz and its financial health would seem to be issues of public interest, particularly in light of current economic conditions. Hertz’s use of the legal system to quash the findings of AI’s report has many characteristics of a SLAPP, but New Jersey, where the case was filed, does not currently have legislation to protect against SLAPPs. The proposed Citizen Participation in Government and Society Act protects defendants, who demonstrate that the complaint is a SLAPP, allowing them to quickly have the suit dismissed and recover fees and costs.

Written by Elizabeth Gronquist

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