It all started Sept. 15 with the release of a report by Audit Integrity, “a leading independent research firm that rates more than 12,000 public companies in North America and Europe based on their corporate integrity.” The report labels Hertz Global Holdings Inc. as one of 20 publicly traded companies with a market cap greater than $1 billion that have the highest probability of declaring bankruptcy.

In its press release that names those 20 companies, Audit Integrity states: “The findings suggest that fraudulent accounting and poor governance impact bankruptcy risk in addition to more generally accepted factors such as measures of liquidity, leverage and profitability.”

Hertz responded by sending a letter to Audit Integrity’s CEO Jack Zwingli requesting a retraction. In it, Hertz outlined “the facts which show our exemplary financial performance” and why it believes Audit Integrity’s “conclusions are an extreme disservice to the investing public.” The letter was cc’d to the legal counsel of the other 19 companies named as bankruptcy risks.

The retraction never came, so Hertz slapped a defamation lawsuit against Audit Integrity on Sept. 25.

“Our lawsuit is an appropriate response to the publication of false and harmful information about Hertz,” said Hertz Chief Executive Mark Frissora in a statement. “Not only are the conclusions about our financial health baseless, but questioning the integrity of our financial reporting is indefensible. We are taking action and responding with the truth because we know that, by not responding, we shouldn’t be surprised if the public believes and acts on misinformation and untruths.”

Not to be outdone in this public war of words, Audit Integrity fired back on Oct. 7, announcing that it has sent a letter to the Securities and Exchange Commission asking it to “investigate Hertz’s ‘blatant’ attempts to induce 19 companies to consider filing lawsuits because of the firm’s recently issued bankruptcy model.”

As of this writing, there is no news on the lawsuit or SEC action.

Hertz’s Lawsuit Chances

Legal experts say it will be hard for Hertz to win its suit and prove that Audit Integrity exercised “reckless disregard of the truth.” Audit Integrity will produce its algorithms and quantitative research to back its claims, research that apparently led to warnings about Bank of America, Lehman Brothers, Bear Stearns and Countrywide Financial. The company will also point to Hertz’s 10-K filings with the SEC, which contain pages of financial warnings. (It seems to be lost in the general news media that those warnings exist in the best of years, too.)

Nonetheless, even if its conclusions are faulty, Audit Integrity is protected by the First Amendment, legal analysts say.

Will Hertz’s action muzzle Wall Street analysts who publish disagreeable opinions? Other such suits have been unsuccessful for the plaintiff s, even considering their financial wherewithal.

Hertz’s Bankruptcy Chances

In ARN’s informal survey of Wall Street analysts regarding Audit Integrity’s claims, analysts are not jumping to Audit Integrity’s defense, and they’re dismissing the possibility of a Hertz bankruptcy. This seems to be a play by a small firm to provoke controversy, publicity and business, most say.

If the intention of the lawsuit was to quash a story that might have gotten whipped up into negative market speculation, it may have had an opposite effect. It has gotten one analyst to wonder why Hertz “doth protest too much,” and thus to dig deeper into Hertz financials. (That digging did not result in finding any improprieties.)

Nonetheless, the news of a threat of bankruptcy does not seem to be hurting Hertz, which successfully refinanced part of its fleet facility recently at a very good rate.

“Bond investors are clearly endorsing the business model,” one analyst said.

Standard & Poor’s raised its ratings outlook to positive, while Hertz announced improved guidance on all financial metrics for full year 2009 in anticipation of its third-quarter report.

In this case, the market appears to have assessed and dismissed Audit Integrity’s analysis on its own.