New York’s next narcissist, Attorney General Eric Schneiderman, is taking a page from the black book of bank torture written by one of his predecessors, the disgraced Elliot Spitzer, and he’s got the U.S. Department of Justice in the bag for him. No surprise there, as this Justice Department is the most politicized in history. By demanding that J.P. Morgan admit wrongdoing in negotiating a settlement of the unproven mortgage fraud allegations allegedly committed by Bear Sterns more than five years ago, Schneiderman and the Justice Department are committing high-order extortion.
When the government demands an admission of liability without having to prove wrongdoing, the class-action plaintiffs attorneys get a gift that applies equally in their civil suits and forces big settlements or judgments. It is crucial to understand that those settlements and judgments are paid from the treasure of the defendants, by the class-action plaintiffs attorneys’ pretend-clients, the shareholders. As the Wall Street Journal editorial page explained Friday, this wealth transfer is just robbing the bank to pay back the plaintiffs’ bar that put them in office.
How do they do it? Spitzer perfected this technique by converting New York’s Martin Act from a sleepy, 1921 law designed to nab bucket shops into a weapon of mass economic destruction. The Martin Act is a tool available to the New York Attorney General only (but not to private plaintiffs or the Justice Department), which prohibits financial practices deemed by the Attorney General to be unreasonable. Not fraudulent, just unreasonable. The Martin Act allows an Attorney General to haul people and companies before a jury and simply allege that in a securities transaction the defendant failed to disclose a material fact. The Martin Act does not require the Attorney General to show an intent to deceive or to demonstrate that the alleged victim relied on the statement. It doesn’t even hold the Attorney General accountable for demonstrating that the alleged victim was actually harmed.
In addition, the Martin Act gives the Empire State’s top legal official extraordinary investigative powers. There is no need for a reasonable suspicion to begin an investigation (even a traffic cop needs a reasonable basis to stop someone for questioning); unlimited pre-complaint subpoena power (“give me all your emails”); unlimited power to interrogate (“lets do a public interrogation in a Manhattan ballroom”); and, no right to counsel. The Martin Act is a perfect fishing license for the unscrupulous.
No other state, and no federal agency has investigative powers as broad and as vulnerable to abuse as those entrusted to the New York Attorney General under the Martin Act. These powers are vastly more intrusive than those of a federal grand jury. One has to go back to the Star Chamber of England to find such an invasive prosecutor’s tool kit.
So, it’s no wonder that Schneiderman and the Justice Department can team up to deliver a gift to their benefactors by extorting an admission of liability from J.P. Morgan for the acts of Bear Sterns without having to prove wrongdoing. This is a colossal conflict-of-interest and breach of fiduciary duty. By holding out for an admission of liability as a condition of settlement, when a defendant is willing to settle, prosecutors abuse their power.
They should either prosecute to a judgment to vindicate a public interest, or settle to conserve public resources. Under no circumstances should they expend public resources to pay back the plaintiffs’ bar. Yet, as is so common in Washington and Albany, these political prosecutors are not subject to the same standards they impose on others via the Martin Act, and although they should be disbarred for this, state bar ethics rules are no match for them, either.