Three years after the collapse of Countrywide Financial Corp. and Lehman Brothers Holdings Inc. ushered in the hardest recession since the Great Depression, throwing millions of Americans out of their jobs and homes, almost none of the wrongdoers has been held accountable or victims made whole.
It’s as if this calamity just fell from the sky, to be borne with the same bewildered resignation that our ancestors might have shown in the face of an earthquake, volcanic eruption or other catastrophic natural disaster.
The same 1921 law that deputized famed Wall Street sheriffs Eliot Spitzer and Andrew Cuomo, the Martin Act, bears substantial responsibility for blocking defrauded investors -- particularly New York’s pension funds -- from recouping their losses and holding wrongdoers accountable.
The Martin Act has succeeded in siccing state law enforcement on financial wrongdoing, particularly during periods when the federal government’s enthusiasm for such work has waned. It’s also come up woefully short in helping investors get their looted money back.
The Martin Act’s strength lies in its common-sense understanding of how the securities markets really function.
For instance, under federal law, investors aren’t legally wronged merely because a company misrepresents or omits important facts. Rather, they must detail -- at the very outset of a case, before company executives have to turn over any documents or sit for any depositions -- how that misrepresentation was made with the intent to defraud them, and how they relied on it in deciding to purchase the stock.
In contrast, New York’s Martin Act holds company executives and securities-industry professionals responsible for foreseeable misrepresentations or omissions of essential facts in their communications -- period. To paraphrase Peter Parker: with great power to generate commissions comes great responsibility.
Also, where federal law is mostly limited to the primary perpetrators of wrongdoing, the Martin Act extends its long arm to a fraud’s collaborators and facilitators: auditors, ratings companies and investment advisers who turned the other way, traded their honest judgment for quick commissions or failed to try to understand the financial instruments they were hustling to unsophisticated clients.
Yet the most important difference between federal and New York state law exposes the Martin Act as sorely lacking.
Federal law long ago recognized the importance of combating investment fraud along a dual track: government action to prosecute wrongdoing and seek what restitution it can for victims, and private action in the form of litigation by the defrauded investors to recover their losses, if the merits of their claims and the magnitude of their damages make such an exhausting and expensive endeavor worthwhile.
Not so in New York. The Martin Act empowers only the attorney general to bring securities cases. Worse, courts are shutting down traditional state common-law negligence claims brought against securities-market participants, on the theory that the Martin Act, in granting exclusive authority to the attorney general, was intended to prevent lawsuits by private investors.
Conceived to be a friend to investors, New York’s Martin Act is smothering the ability of defrauded investors to seek restitution. That’s why the deputy majority leader of the state Senate, Republican Tom Libous, and I have proposed legislation that would authorize pension funds to sue for damages that result from violations of the act.
As Congress and the federal courts impose increasingly stringent substantive and procedural limitations on holding wrongdoers in our securities markets accountable, New York urgently needs to give its investors -- particularly its public and union employee pension funds -- the means to bring claims of their own, to recover some of their tens of billions of dollars in losses and to identify those who caused those losses.
Because the financial crisis didn’t just fall from the sky.
(Rory Lancman, a Democrat, has been a member of the New York State Assembly since 2007. The opinions expressed are his own.)
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