It’s a burning question with a slow fuse: How much blame should credit-rating firms bear for the 2008 financial meltdown?

It’s finally starting to generate some heat in South Carolina.

Attorney General Alan Wilson is suing a household name that’s made its bones by analyzing and predicting the creditworthiness of borrowers.

Wilson isn’t alone. Lawyers at the Justice Department and top prosecutors in more than a dozen other states also are going after Standard & Poor’s Financial Services, better known as S&P.

But in an unexpected twist, the firm’s legal team, led by legendary free-speech lawyer Floyd Abrams, drew first blood in South Carolina by playing the First Amendment card. For now, Wilson is on defense to keep the ball in his own court.

Front burner

S&P and its small clutch of competitors operate under what critics see as an inherently flawed business model.

Companies and government agencies pay the ratings firms to grade the quality of their debt, creating enormous conflict-of-interest pitfalls. The industry’s shortcomings were exposed in 2008, and now they’re coming under heavy fire.

The U.S. Justice Department made its first big move Feb. 4 by suing S&P, which is owned by publishing giant McGraw-Hill Cos. The feds are seeking more than $5 billion from the ratings firm for putting its trusted stamp of approval on bundles of low-grade “subprime” mortgages that later went bust.

The fallout cost investors billions and helped drive the U.S. economy into its deepest recession in decades.

Justice’s lawsuit wasn’t a surprise in Columbia. Wilson’s office was kept in the loop as the federal agency built its case. The AG decided last year to pursue his own complaint before a Richland County jury in state court for “unfair and deceptive practices relating to ratings” S&P issued. Wilson cited violations of the S.C. Unfair Trade Practices Act and the S.C. Uniform Securities Act.

This lawsuit, too, wasn’t a surprise to S&P. By state law, Wilson’s office was required to alert the opposition about the litigation, said Jared Libet, assistant attorney general. Libet mailed off the official notice to Abrams on Dec. 20.

Lawyers from both sides met Jan. 23. Then, Abrams fired off a pre-emptive lawsuit Feb. 13 against Wilson in federal court in Columbia. The tables were turned. South Carolina was now the defendant rather than the plaintiff.

“I was surprised,” Libet said Thursday. “They did not tell us that was going to occur.”

Free speech?

Abrams, who didn’t respond to a request for comment last week, is playing to his strength. He’s perhaps best-known for successfully defending The New York Times in its efforts to publish the Pentagon Papers in 1972.

In S&P’s case, he argued that credit ratings, like newspaper editorials, are protected under the First Amendment.

He also has said that South Carolina’s Unfair Trade Practices Act “impermissibly” punishes free speech because it doesn’t require proof that S&P knew its bond ratings were false when it issued them.

The First Amendment is irrelevant in this instance, Wilson’s office countered.

“It doesn’t protect against commercial speech that’s false or misleading,” Libet said.

Securities law expert John Freeman speculated about S&P’s aggressive cat-and-mouse legal strategy. He said the firm’s lawyers are looking beyond Columbia to the more “business friendly” appeals court in Virginia that hears federal cases from South Carolina.

“What they’re really saying is, ‘We’d rather be in federal court. We’re going to force you to meet us in federal court. We don’t want any part of a Richland County local jury,’ ” said Freeman, distinguished professor emeritus at the University of South Carolina School of Law.

Wilson isn’t standing by. He filed his lawsuit in Richland County on Feb. 13. S&P has requested that the case be transferred to federal court.

From here, Wilson, Abrams and who knows how many other lawyers will be squabbling over “venue,” or where the case should be heard.

It’s likely to be the start of a long, ugly and expensive process.

Kind of like that last recession.

Reach John McDermott at 937-5572.