The law can be used to file civil suits as well as criminal charges – and the lower standard of proof needed in civil court has made that an attractive alternative. In June, Eric Schneiderman, the New York state attorney general, sued Barclays, claiming the bank lied to customers in its marketing materials, masking the role of high-frequency traders in the operation of its dark pool. In 2012, Schneiderman sued Bank of New York Mellon Corp. over foreign-currency trading, saying it defrauded public pension funds of $2 billion. He’s also pursuing a case filed by his predecessor, Andrew Cuomo, against Ernst & Young, claiming the firm facilitated accounting fraud at Lehman Brothers. The Martin Act was also used by Manhattan District Attorney Cyrus Vance Jr. to charge the former chairman, chief financial officer and executive director of the bankrupt law firm Dewey & LeBoeuf with theft and fraud. Vance is also investigating whether the Port Authority of New York and New Jersey violated the act in financing the renovation of the Pulaski Skyway in New Jersey at the direction of Gov. Chris Christie.
The law was enacted in 1921 — more than a decade before the birth of the U.S. Securities and Exchange Commission — to deter fraud in the sale of securities and commodities. It covers “all deceitful practices contrary to the plain rules of common honesty,” an appellate court ruled in 1926. To make cases, prosecutors must show false statements or omissions. As written, the law only conferred the power to pursue civil suits but was later expanded to allow for criminal prosecutions. Robert Morgenthau, who spent 35 years as the Manhattan district attorney, used the law to shut down Ponzi schemes, mortgage fraud and boiler room pump-and-dump operations. Eliot Spitzer re-imagined the law to patrol Wall Street when he was state attorney general from 1999 to 2006. He unearthed abuses in stock research by Merrill Lynch and other Wall Street firms that federal authorities hadn’t pursued.
Supporters say the law provides needed deterrence to make Wall Street think twice about misleading investors. They argue that the Martin Act remains a valuable weapon against banks that have been battling federal prosecutors after the 2008 meltdown. Critics call the law a license to extract huge payments from companies to glorify politicians and help ambitious attorneys general win election to higher office. A nine-year-old case against Maurice “Hank” Greenberg, former chairman of American International Group, grinds on even after a judge has whittled it down. Schneiderman wants to bar Greenberg, who was 80 when the suit was filed, from the securities industry or serving on the board of a public company. But even as cases like Barclays renew debates over the law’s power, both sides agree that it’s been more successful for extracting fines or banning individuals than in sending executives to jail.
The Reference Shelf
- In 2004, Legal Affairs magazine published a history of the Martin Act.
- A 2011 speech on the Martin Act and white-collar crime by Manhattan District Attorney Cyrus Vance Jr.
- A 2013 report by the New York State White-Collar Crime Task Force.
- A 2014 speech by New York Attorney Eric Schneiderman on high-frequency trading and dark pools.