The Worst Law in America Congress can limit the damage of New York’s unjust Martin Act.
https://www.wsj.com/articles/the-worst-law-in-america-1522014930
The competition is fierce for the worst law in America, but our pick goes to New York State’s notorious Martin Act. Now an effort is building in Congress that could curb its worst excesses and help the innocent.
Passed in 1921 to stop “boiler-room” stock-sale operations, the Martin Act lets prosecutors call almost anything fraud, and there’s no requirement to prove evil intent in civil cases. Yet proving scienter, or the intent or knowledge of wrongdoing, has been a staple requirement of British and American law for centuries lest innocent mistakes be prosecuted as intentional frauds. The Martin Act thus gives prosecutors a huge legal advantage against defendants, though for decades it was used sparingly.
That changed in the early 2000s when then New York Attorney General Eliot Spitzer wielded the Martin Act to bludgeon settlements out of big Wall Street firms without going to court. The law does particular damage because New York is America’s financial capital and nearly every company sooner or later does business there. Note how Mr. Spitzer’s equally unconstrained successor, Eric Schneiderman, is leveraging the Martin Act to investigate Exxon for purportedly misleading the public about climate change.
Prosecutors don’t want to give up this immense power, and legislators in New York have been loath to challenge them. But Congress has the power to act under the Constitution’s Commerce Clause. Legislation introduced last month by Rep. Tom MacArthur (R., N.J.) would address the problem by pre-empting state enforcement of civil securities fraud.
The Securities Fraud Act of 2018 is tailored narrowly. It would apply to companies listed on a national market like the New York Stock Exchange—i.e., those obviously engaged in “interstate commerce.” It also would leave intact the states’ authority to prosecute criminal fraud. A New Yorker unloading fake shares in a nonexistent Chilean gold mine—or anyone else engaged in genuine fraud—could still be prosecuted by Mr. Schneiderman.
There is precedent for this kind of pre-emption. In 1995 Congress tightened the rules for federal class-action lawsuits alleging securities fraud. This was meant to curb nuisance suits and settlements, but plaintiffs ran to file in state courts instead. So three years later Congress pre-empted most such state claims. In 1996 lawmakers exempted nationally traded securities from state registration laws to prevent them from being subject to 50 different sets of requirements.
Mr. MacArthur’s bill is in this tradition of standardizing rules to strengthen capital markets. Even some Democrats have admitted there’s a problem. In 2007 Sen. Chuck Schumer signed a report, along with then Mayor Michael Bloomberg, on maintaining New York’s and America’s leadership in financial services.
The authors cited a McKinsey survey showing that executives much preferred the U.K.’s “clarity of rules,” “uniformity of regulatory enforcement,” “cost of ongoing compliance” and more. “The prevalence of meritless securities lawsuits and settlements in the U.S. has driven up the apparent and actual cost of business—and driven away potential investors,” Messrs. Schumer and Bloomberg wrote. “In addition, the highly complex and fragmented nature of our legal system has led to a perception that penalties are arbitrary and unfair.”
The MacArthur bill would hardly give bad behavior a free pass, given how often state enforcement is duplicative. In a 2012 paper, Vanderbilt professors Amanda M. Rose and Larry J. LeBlanc sifted through three years of SEC filings for nearly 2,000 NYSE companies. Of those that disclosed securities enforcement from a state regulator, the feds had brought a related action 91% of the time. Noteworthy, too, was the hint of political motivation. Elected state regulators were four times as likely to take action as appointed ones. That jumped to nearly seven times as likely for elected Democrats.
It’s easy to see why, since the legal grandstanding works. In New York the Attorney General’s office has been a way station to the Governor’s mansion—for Mr. Spitzer and then Andrew Cuomo. But whatever prize Mr. Schneiderman now may have his eyes on, fair justice demands that a prosecutor prove the intent to commit a fraud beyond a reasonable doubt. Congress can help the rule of law and U.S. capital markets by pre-empting the Martin Act.
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