Devil’s bargain: Wall St. & the Martin act

Business leaders are fuming over Attorney General Eric Schneiderman’s nervy use of the Martin Act, the state law that gives him super-broad powers to investigate and press charges against alleged financial fraud. For example, Schneiderman has gone after several large energy firms for allegedly over-optimistic financial comments on upstate gas “fracking,” a charge conveniently aligned with his own anti-fracking stance. Recently he used the act in an attempt to upset a settlement deal between bankers and the feds over mortgage misdeeds — critics charge him with “blindsiding” the Bank of New York Mellon with what BNYM calls “outrageous” and “baseless” fraud charges.

But it’s a mistake to see Schneiderman’s left-tilting politics as the main source of the problem. As became clear under the reign of then-AG Eliot Spitzer, the trouble is with the state of the Martin Act itself. And the state of that law results from a devil’s deal that many leading New York City firms were happy enough to accept — until it blew up in the complacent faces of their execs and lawyers.

Albany passed the Martin Act in 1921, strengthening it at intervals so that it now grants more sweeping powers to New York’s AG than his federal or state counterparts wield. Equally important was that, over the decades, it became subject to an “unspoken gentleman’s agreement” (as Nicholas Thompson called it in a 2004 Legal Affairs piece).

Crusading prosecutors like Louis Lefkowitz used the act to chase out of town the crumbums, sad sacks and grifters of the investment world. And up to a point — a point painfully symbolized by the career of Bernard Madoff — it seemed to work. A lot of shady penny-stock operators, worm-farm promoters and small-town Ponzi guys did head for states where such doings were less effectively policed.

That in turn pleased many on Wall Street — who gained from the general public impression that if you were dealing securities in a major way out of New York, you’d had to pass closer inspection than some guy from Florida or Utah.

Trouble is, with few well-established businesses pushing back, the Martin Act was turning by stages into a blank check for the prosecution. Under its terms, the AG can subpoena witnesses or demand the production of documents without probable cause or a grand jury’s say-so. He can sue anyone for alleged fraud without showing that anyone relied on the alleged misrepresentations to their detriment, and, astoundingly, without even having to show a guilty state of mind or intent to commit fraud. In this the act goes far beyond both federal securities law and common law.

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