The Sheriff Walks Down Main Street

Four years ago, Eliot Spitzer was a lowly candidate in a tight five-way contest for not-the-top job in his state, New York. Today he is Eliot Spitzer, superstar, feared and revered. Even as markets from New York to Tokyo monitor his every step, he guides the rewriting of the securities law of the world's largest economy - practically singlehandedly, it sometimes seems. Just this week, he is working on a deal with federal regulators to extract billions in settlements from securities industries for conflicts over stock analysts. His future? It has no limits.

Mr Spitzer is a talented fellow; his current obsession, nailing corporate wrongdoers, fits perfectly with America's new business puritanism. But his rise is also due to the rising national status of his job, state attorney-general. In recent years, states' attorneys-general have used the weapon of litigation to become players on the national stage. There they are successfully battling with regulators and Congress for the power to make US policy in crucial areas.

The attorneys-general derive their might from a legitimate source: America's federalist system, which respects the laws and powers of the states. But one can also argue that the new national policy-setting aspect of the AGs' work is an undemocratic abuse of federalism - and as much about garnering power as it is about meting out justice. In the attorneys-general and their class-action lawyer allies, the US is acquiring "an unelected fourth branch of government", says Walter Olson, author of a forthcoming book. *

Traditionally, the state attorney-general was a glorified version of a sheriff. Indeed, this is how Mr Spitzer himself originally envisaged the post. When he launched his campaign, the Democrat cited as a qualification not so much his mastery of securities law but his successful legal case concerning Larry Hogue, a homeless vandal on Manhattan's Upper West Side.

But as Mr Spitzer built his career, attorneys-general were beginning to band together and pursue companies for alleged wrongdoing. Companies that might quarrel with one state could ill afford to fight dozens. A joint action by states against tobacco brought a $246bn settlement, with the cash going to outside lawyers and state coffers. There was the states' case against Microsoft; and the action against Smith & Wesson and other gunmakers, led by mayors but supported by Richard Blumenthal, attorney-general of Connecticut, and Mr Spitzer.

The attorneys-general were not only enforcing state law but also changing national law - sometimes in ways that Congress, the executive or the Supreme Court had declined to do. Congress, whose job it is to write tax law, has never levied a broad national tax on tobacco to compensate specifically for smokers' health bills. But the attorneys-general, through their settlement, in effect did so. In the 1990s, the Supreme Court and a Republican-led Congress rejected some forms of gun control; attorneys-general, with White House support, attempted to make that same gun control the national rule.

And so the trend has been with Wall Street's reform. there is not yet a new federal law or regulation regarding stock analysts. Nor is there new law on allocation of shares in initial public offerings. Such practices, while long deemed unethical, were not illegal.

Enter Mr Spitzer. As usual, his power started with federalism: he dusted off New York state's Martin Act, an obscure document passed well before federal securities law and, in some ways, more aggressive in its definition of wrongdoing. He extracted a $100m settlement from Merrill Lynch for the abuses of its investment bankers and analysts. The money went to the coffers of New York and other states; the effect was felt nationwide, by all securities investors.

Similarly aggressive has been his IPO campaign. Never mind that some of the behaviour involved had not been deemed illegal. In Mr Spitzer's view, it was actionable - even retrospectively.

Lately, the matter of state versus federal power has become the explicit topic of debate. Congressman Richard Baker of Louisiana, a Republican, has assailed Mr Spitzer for aggressive litigation; recently he complained that in the Merrill Lynch settlement, "not one penny went to a defrauded investor". Mr Spitzer struck back, saying he acted because of a "federal enforcement vacuum" in Washington.

Of course, Republicans are normally pro-states' rights, so one can argue that it is hypocritical for them to complain about attorneys-general. The reply is that the constitution's Framers did not, in general, intend one state to write law for the citizens of others. So even if you agree with the aims of the states' various campaigns, you can still take issue with their being involved at all. Different in personality or moral character as the attorneys-general and their corporate targets may be, the two resemble each other in one way: both sides in their day have wielded enormous power.

*Rule of Lawyers, Walter Olson, St Martin's Press

© Copyright 2002 Financial Times

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