The Corner

Spitzer vs. Brokerages

I wrote a cover story on Spitzer in NR a few years ago. An excerpt:

[Spitzer] got his hands on e-mails from Henry Blodget, Merrill Lynch’s high-flying Internet-stock analyst, in which Blodget confessed that he thought the stocks he was touting were junk. He was selling them because Merrill wanted the companies to which those stocks belonged as investment-banking clients.

New York’s Martin Act gave Spitzer sweeping powers to prosecute securities fraud. As Nicholas Thompson summarized some of that act’s distinctive features in a recent article in Legal Affairs: “People called in for questioning during Martin Act investigations do not have a right to counsel or a right against self-incrimination. Combined, the act’s powers exceed those given any regulator in any other state…. To win a case, the AG doesn’t have to prove that the defendant intended to defraud anyone, that a transaction took place, or that anyone actually was defrauded.” . . .

Merrill Lynch settled. Soon afterward, Spitzer started actions against several other Wall Street companies and got them to settle, too. The settlements included fines, which critics said were too light. No matter: Spitzer was more interested in restructuring the industry to reduce conflicts of interest. Perhaps the government was right to crack down on these abuses. Perhaps the regulations he devised are worthwhile, although there are plausible criticisms. But state attorneys general are not supposed to be in the business of issuing securities regulations. . . .

And what about the responsibilities of investors? Shouldn’t they have known to take investment advice with a grain of salt? “I don’t want to say the public shares responsibility,” Spitzer told Money. The Merrill Lynch case grew out of a private suit brought by a man who lost half a million dollars through recommended investments. If you’ve got half a million to lose, you might want to consider buying some financial sophistication. Merrill Lynch customers who have followed Spitzer’s suits with their own have lost their cases. One federal judge concluded: “The facts and circumstances show beyond doubt that the plaintiffs brought their own losses upon themselves when they knowingly spun an extremely high-stakes wheel of fortune.” It may be that Merrill Lynch was undone not by the legal merits, but by the threat that Spitzer would pummel its reputation by using his Martin Act powers.

Ramesh Ponnuru — Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg View, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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