An article in the Wall Street Journal says that the incoming New York state attorney general, Eric Schneiderman, is going to be nicer to Wall Street than his predecessors Eliot Spitzer and Andrew Cuomo. Given that Cuomo decided to take financial firm chicanery seriously only fairly late in his term of office, the Wall Street Journal assessment does not bode well for the prospect of tough enforcement.
The reason this matters is that the New York state AG has a particularly effective weapon, the Martin Act. One of the continuing frustrations I have as a writer and a citizen is the use of the word “fraud”. Activities that by any common-sense standard are fraudulent probably don’t meet the legal standard for fraud. In very crude terms, one of the hurdles that needs to be overcome is intent. If a perp can argue that he thought what he did was not improper (his attorneys or accountant blessed it, it never occurred to him it was an abuse, etc.) or he can claim it was a mistake, he can get off scot free. The very fact that Joe Cassano, the head of AIG’s Financial Products Group, has not been prosecuted serves as an illustration of difficulties involved.
My understanding (and attorneys are encouraged to chime in) is that the Martin Act sets the groundwork for criminal prosecutions for these “it ought to be a fraud” activities. Per Brooke Masters’ biography of Eliot Spitzer:
..the law gave the attorney general a whole range of civil powers: he could subpoena documents, haul brokers and investment bankers in for public questioning, and, unlike his federal counterparts t the SEC and the Justice Department, he didn’t have to specify up front whether he was going to seek criminal charges or file an easier-to-rove civil case. An equally obscure 1926 court case, People v. Federated Radio Corp., had further strengthened the attorney general’s hand by holding that the Martin Act did not require proof that securities sellers made a willful decision to commit misconduct.
A critical part is the determination that the prosecutors do not need to establish that the principals made “a willful decision to commit misconduct” in financial fraud cases. That get prosecutors clear of the swamp of needing to prove intent.
Now the interesting part of this Wall Street Journal story is it manages the artful task of making it sound like Schneiderman will be a good thing for financial oligarchs without insulting his manhood and saying he won’t be all that firm about financial crime. In fact, as the article makes clear, the new AG clearly believes he is vigilant; he is already looking at “credit-card companies, debt collectors, and mortgage and foreclosure issues”, for instance, and has also conferred with Elizabeth Warren.
But it is pretty clear that Schneiderman will focus on what amount to “retail” issues. From the Journal story:
That isn’t to say Mr. Schneiderman is likely to take it easy on Wall Street should problems emerge. But to the extent that Mr. Schneiderman is passionate about finance at all, it is when it intersects with civil rights. Areas such as predatory lending and health care could be fertile ground for action, say people close to him…. In his first case, he filed suit on Jan. 6 against a Pennsylvania power plant allegedly polluting New York state air. His agenda may include workplace discrimination issues, unscrupulous health-care brokers and companies that commit “green fraud” by falsely claiming products are organic, according to people familiar with the attorney general’s office.
On the one hand, there are so many abuses there that there is certainly plenty to do. But the implicit logic here is faulty. Institutional abuses affect the average guy more directly than one might think. Municipalities are hurting in part due to complex swaps sold to them that blew up. As we detailed at length in ECONNED the real driver for the toxic phase of the subprime bubble was a short/correlation trade strategy by the hedge fund Magnetar that led to the creation of a large number of dodgy CDOs. While there were plenty of bad subprime loans made prior to late 2005, Magnetar’s Constellation program turbo-charged a destructive dynamic. The subprime market would have come to an end much sooner, and the US would likely have had an saving & loan scale crisis, rather than being the epicenter of a global financial crisis (the use of CDS in these CDOs multiplied the damage vastly beyond the value of the actual subprime loans). And since the direction of policy seems to be to push more people out of government retirement programs and into 401(k)s, abuses in the institutional investment realm matter to the little guy more than Schneiderman might realize.
What do readers think? What areas do you think Schneiderman should target? And what abuses in what might look to his office like high finance do you think merit scrutiny?