In my most recent column, I invoked the new year as an opportunity to look back and to reflect on the events of 2010. Now that 2011 has arrived, it's a good opportunity to look forward. As a commercial litigator working in New York, one question on my mind is whether the incoming New York State Attorney General, Eric Schneiderman, will follow the lead of his predecessors, Eliot Spitzer (known as the Sheriff of Wall Street) and Andrew Cuomo, who were perhaps best known for how aggressively they pursued Wall Street and other members of the business community. In light of the profound investigative and enforcement powers that the Attorney General enjoys, this is a question that should also be on the minds of inside counsel who fall within his jurisdiction.
Attorneys General Spitzer and Cuomo received both praise and criticism for their willingness to pursue high-profile industry investigations. Observers noted not only their zeal, but also the means they used for investigating Wall Street: New York's Martin Act, which "authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State." The Act's purpose may sound ordinary, but the power it grants to the Attorney General is not. The Martin Act authorizes the Attorney General to bring civil or criminal charges. Remarkably, even in criminal cases, the Attorney General need not prove scienter or criminal intent to prove a violation of the Act. And as summarized in a recent Wall Street Journal blog post, the Act grants the Attorney General sweeping investigative authority: "It enables him to subpoena any document from anyone doing business in New York and, if he so desires, keep an investigation entirely secret. People subpoenaed in Martin Act cases aren't afforded a right to counsel or the right against self-incrimination." The Act had been more or less used sparingly for years, until Attorney General Spitzer invoked it to target Merrill Lynch, the hedge fund industry and the mutual fund industry, and then Attorney General Cuomo notably investigated companies involved in the subprime mortgage crises, and others.
We may get some hints of Attorney General Scheiderman's views by observing his handling of the case that Attorney General Cuomo recently filed against Ernst & Young. On December 21, Governor-Elect Cuomo left his successor a parting gift: "[A] Martin Act suit . . . charging the accounting firm with helping Lehman Brothers Holding, Inc. . . . engage in an accounting fraud involving the surreptitious removal of tens of billions of dollars of fixed income securities from Lehman's balance sheet in order to deceive the public about Lehman's true liquidity condition." (So said the Governor-Elect's press release. Of course, these are just unproven allegations.)
The action seems characteristic of the suits we have seen in recent years from the Attorney General's office--a well-known business has some connection to a major, salient event (here, the collapse of Lehman Brothers), and finds itself within the crosshairs of the Attorney General's office. We have repeatedly witnessed that phenomenon during the terms of the last two Attorneys General, and we will learn, sooner or later, whether Attorney General Schneiderman will repeat the pattern. In the meantime, we may learn something about Attorney General Schneiderman's philosophy from the way he handles the Ernst & Young case.
Should the Attorney General behave as his predecessors did, businesses will have even greater cause for concern than they previously had. Two months ago, the First Department of New York's Supreme Court, Appellate Division, held that the Martin Act does not "preempt otherwise validly pleaded common-law causes of action." Private plaintiffs will no doubt argue that they can bring suits based on the same occurrences that give rise to a Martin Act violation, so long as they can assert a claim that is not based on obligations that arise from the Martin Act--for example, breach of fiduciary duty or gross negligence. Because attorneys representing private plaintiffs can gain access to evidence turned up during an Attorney General's investigation, that investigation may be the beginning of a long litigation nightmare for the investigated company.
In short, we should all be watching closely the actions of our new Attorney General. Stay tuned.
Read Matthew Ingber's previous column.