ALBANY – Ten prominent public figures have signed on to an amicus brief urging the New York Court of Appeals, in People v. Greenberg, 401720/2005, to throw out Martin Act claims against former American International Group CEO Maurice "Hank" Greenberg, arguing that the state law is preempted by federal statute.
The amici, including a former U.S. attorney general, a former commissioner of the Securities and Exchange Commission, four former state attorneys general, a retired congressman, two former governors and the former mayor of New York City, argue that if Attorney General Eric Schneiderman’s case against Greenberg and other AIG defendants is allowed to proceed it would subvert federal securities law and the principles of federalism while undermining the congressional intent of establishing a uniform, national regulatory scheme.
They are seeking to rein in the potent but once largely dormant 1921 statute revived a decade ago by Eliot Spitzer when as attorney general he took on the securities industry and became known as the "Sheriff of Wall Street."
The Martin Act gives the attorney general broad authority to investigate suspected securities fraud, including the power to obtain records and pursue criminal or civil charges against companies without having to prove intent to defraud. Spitzer deployed the Martin Act because he thought federal regulators were turning a blind eye to rampant abuses in the financial industry.
But in a brief filed last week in Albany, the amici claim that Spitzer and his two successors as attorney general, now Governor Andrew Cuomo and Schneiderman, have in the AIG/Greenberg case pushed the Martin Act well beyond federal limits and in a manner that threatens to throw the national securities regulatory framework into disarray.
They argue that the state has no independent interest in the case and, if it is allowed to proceed, any corporation whose shares are traded on a New York exchange would be subject to actions that could make "them liable for money damages under lax substantive and procedural standards that Congress has expressly rejected as contrary to national policy."
Signing on to the brief were former SEC Commissioner Paul Atkins; former U.S. Attorney General Richard Thornburgh; former Governors George Pataki of New York and William Weld of Massachusetts; former New York City Mayor Rudolph Giuliani; former Representative Michael Oxley, R-Ohio; and former state attorneys general Dennis Vacco of New York, F. Chris Gorman of Kentucky, and Andrew Miller and Anthony Troy, both of Virginia.
The case against Greenberg and AIG began in 2005 when Spitzer alleged the businessman and the firm’s former CFO, Howard Smith, violated the Martin Act by perpetrating "fraudulent transactions designed to portray an unduly positive picture of AIG’s loss reserves and underwriting performance," according to court records. Although criminal charges were never brought, AIG admitted to structuring sham transactions to boost its loss reserves and agreed to pay a $1.6 billion fine. Greenberg, who by that time had been removed as CEO but remained an AIG shareholder, strongly objected to the settlement.
Meanwhile, the Martin Act claim has been working its way through the courts for years and is headed for a showdown on March 18, when the Court of Appeals hears oral arguments on whether the remaining causes of action should proceed. A majority of the judges who will hear the appeal were appointed to the high court by Pataki.
In their brief, the amici argue that the case is essentially a private securities fraud action seeking to hold the defendants liable for money damages sustained by AIG shareholders—or precisely the type of action that is preempted by the federal Securities Litigation Uniform Standards Act of 1998 (SLUSA). Indeed, a parallel SLUSA class action making claims similar to those of the state in the Martin Act case is pending before Southern District Judge Deborah Batts (In re American International Group Securities Litigation, 04-cv-8141) and the state has conceded that a settlement in the federal matter would bar New York’s claims, according to court papers.
"It would be one thing if the Attorney General were using the Martin Act in this case to enforce or protect some sovereign interest of the State—a type of action Congress has expressly saved from preemption," the amici argue. "But the Attorney General is doing no such thing. Here, the only damages sought by the Attorney General are private damages on behalf of private individuals for private injuries."
Beyond this case, the amici assert that since Spitzer latched on to the Martin Act in the early 2000s, the attorney general’s office "has made a point of flexing [its] regulatory muscle against corporations and individuals throughout the Nation," assuming the role of "de facto nationwide regulator" in violation of the concept of federalism.
Among those supporting the attorney general are the AARP and the North American Securities Administrators Association.
In an interview, Spitzer dismissed the Greenberg amici brief as the "voices of the broken polices of the Republican Party unfortunately trying to protect folks who did enormous harm to our economy over the past decade."
"The amicus brief makes legal arguments that are both tired and fundamentally flawed, ignoring the essential role the state, as a sovereign, plays in ensuring the integrity of the capital markets," Spitzer said. "The importance of that function was highlighted beyond any doubt over the past decade precisely because the federal government utterly failed in its mandate and obligation in that domain. For the amicus brief to hide behind the empty argument of federalism is both wrong on the law and horrendous policy."
Pataki, now of Chadbourne & Parke, said in an interview that he has long been troubled by the "expansive" interpretation of the Martin Act by Spitzer and his successors and, when asked by the Greenberg camp to join in, did so after carefully reviewing the briefs. The ex-governor said he is concerned both from a legal and economic standpoint.
"I think it is important for the state of New York, I really do," Pataki said. "I think the expansive interpretation of the Martin Act raises a question of its legal validity and has horrible, negative consequences to retaining or attracting business, particularly financial sector businesses, to New York."Pataki said that as governor his efforts to attract some businesses were hindered by the aggressive policies of the attorney general.
"One of my main goals was to make New York more economically competitive and as I was working aggressively to get companies to stay or expand," Pataki said. "I can’t tell you how many times a company would say, ‘It’s bad enough we have to deal with all the other issues in New York, now we have to deal with the attorney general treating us like the SEC and other federal agencies all combined.’ It was a challenge."
Solicitor General Barbara Underwood said in her brief that New York does have a sovereign interest in "ensuring the economic well-being of its residents by securing an honest marketplace and protecting the public from fraud." She compares the AIG/ Martin Act matter to a simple criminal case in which the state seeks restitution and reparation to compensate victims.
"Defendants are incorrect in asserting that there is no public interest in seeing that victims obtain redress for injuries caused by violations of New York statutes," Underwood said in her brief. "The government may properly devote public resources to redressing harms to victims of wrongdoing, and victim-specific monetary relief serves important public purposes in deterring such wrongdoing and promoting cooperation with law enforcement."
Walter Dellinger and Deanna Rice of O’Melveny & Myers in Washington, D.C., and Andrew Frackman and Anton Metlitsky of the New York office of O’Melveny are listed as attorneys for the amici curiae.
Slated to argue March 18 are David Boies of Boies Schiller & Flexner for Greenberg. Underwood will argue for the state.
@|John Caher can be contacted at email@example.com.