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?
Sigh I just wish the Martin Act had antitrust provisions in it as well…think of what could be done with that. Now that would be regulation.
As to my opinion of what Schneiderman should do…any municipality or pension fund that was hurt through complex instruments ultimately tied to CDO’s full of MBS should be targeted.
Who cares their(the brokers) intent in selling them…if the investment firm extracted money from those hapless souls who thought they were being wise, we have to go after them. Misrepresentation occurred at some point, whether with true intent or not. If there is any point in time where the Martin Act should be abused, it’s now. The financial oligarchy is abusing the entire nation, and it’s time they felt the wrath of something they cannot stop.
I disagree with you about Cassano. I conclude Cassano “got off” when the SDNY US Attorneys office and SEC realized neither could prosecute Cassano and keep Goldman Sachs (GS)out of the case. Since GS was AIG’s counterparty in billions of dollars of CDSs, the DOJ and SEC had to get GS’s permission to pursue Cassano.
I see at least one other problem in prosecuting Cassano. The DOJ and SEC had to prove Cassano deceived PriceWaterhouseCoopers (PWC). I don’t buy it. If PWC is so incompetent that it was deceived, why does the PCAOB let PWC stay in business? Why did the SDNY US attorneys office prosecute Aleynikov? Because he crossed GS.
Cassano hung tough, in effect telling the DOJ and SEC, “prosecute me and I’ll nuke your entire corrupt system. Go ahead punks, make my day. Prosecute me and you’ll never return to your multimillion dollar a year NYBigLaw partnerships”. Go Cassano!
The case against Cassano reminds me of 1994’s Joe Jett (JJ) case. The JJ case was preposterous. Mary Jo White, the ping-pong ball Fed, dropped it after she was unable to intimidate JJ into copping a plea. Eventually the SEC had an “administrative law judge” fine JJ $8.4 million. What a farce. To think JJ deceived: KPMG, GE’s controller’s office, Kidder’s controller’s office and GE’s 450-person internal audit staff. If you believe that, I’ve got a bridge over the East River to sell you.
That’s how I see it.
I would tend to tilt in that direction too. There are two related factors. One is the complexity of prosecuting any sort of securities fraud case. It can be very very hard to get a conviction, especially is a legion of “expert witnesses” that Charles Ferguson profiled in his film Inside Job would be called to testify for the defense in defense of all sorts of mathematical and statistical lunacy that no juror could possibly understand.
Second is that New York City runs on financial fraud and illegal immigration. Looting and slavery basically.
It hasn’t always been thus. Back when regulators regulated and risk capital was wiped out when it was wrong — it was somewhat in control. Now it’s not. If child prostituion is de-facto legal and indeed even financing the public purse, then hauling out some Johns from brothels caught with 12 year olds won’t fly in court very easily. It’s hard to shut down the brothels when the city budget depends on them.
I don’t think our culture has the political or social maturity to grapple with what has happened to it. Indeed it may take a grinding bear market and the collapse of the extends and pretends before we get there — with a new cast of “leaders”.
I would imagine something more like the South African Truth and Reconciliation Commission — where it’s less a matter of prosecuting the lever pullers as it is an entire social psychoanalysis. I think that’s what is needed.
The Cassanos and his enablers at the accounting firm and at every level of the business were all in on the big loot. There really were no victims among that crowd, IMO. The victims were the generations to come, they young, the prudent, the savers, all of whom inherit a broken economy and, almost worse, a “social compact” frayed so badly as to be non-existent. But not to get too sentimental on the last point, when was there ever really? A few decades after WWII, maybe. Otherwise It’s always been a Manichean collision of perps and sheep. It’s the American Way, it’s the Human Way, except for a few transendent souls who really made a difference. Sadly, none of that ilk seem in site anywhere across the political spectrum.
My thought on reading that piece was, “Aha, proof that social niceties (ecology, sex discrimination, social justice) are little more than a distraction from the systemic corruption of our age. Don’t look over there, look over here.”
It will work too, because it is too scary for most people to even contemplate what has happened to our country. They think we are as crazy as Loughner.
If he only cares about finance where it intersects with civil rights, that’s fine. Finance was used to steal the savings of poor blacks (among others) by convincing them that they could afford mortgages that an honest seller would know were doomed to failure. Sounds like civil rights to me.
I agree with Yves that the Martin Act is Schneiderman’s best weapon. I’d love to see him go after the swaps sellers. Probably not happening. For example, the NYC Comptroller is demanding that servicers whose stock is held by City pension funds look into their foreclosure practices– incredibly without demanding some honesty on their books — which should be the real problem from his point of view! Even the most aggressive sheriffs are afraid to pull back the veil.
My vantage point is from the weeds of the foreclosure crisis representing individual borrowers. The Cuomo staff I met seemed focused on the predatory lending/discrimination angle. Then there was the Clearinghouse litigation- lots of agita, no real results for the little guy.
There may not be much Martin Act expertise remaining at AG from the Spitzer era. Attorneys like to practice what they know. Spitzer’s office (circa 2003) would have used the crisis, the negative press and the threat of the Martin Act to extract some serious cash from TBTF, if not a downright change in behavior. Sorry, but Schneiderman is just too closely aligned with the dysfunctional pols in the NYS Assembly for my money.
The stock market can be viewed as a meter for the prevailing social mood. If this is true, optimism is too high for “tough enforcement” at this time. After being exposed, Nixon wasn’t forced out until the S&P dropped 50%. Once this upward correction ends and the bear market resumes in earnest, legal technicalities will be ignored and heads will roll.
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