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Manhattan Institute

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Liberal Officials Commit Wrongs in the Name of States' Rights

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Liberal Officials Commit Wrongs in the Name of States' Rights

The Wall Street Journal February 28, 2017
Legal ReformCivil Justice

New York’s attorney general may disagree with federal policy. He should not be able to override it.

After years of arguing for centralizing more power in Washington, Democrats are newfound believers in “states’ rights.” Writing in the New Republic this month, former New York Gov. Eliot Spitzer called on state officials to “utilize the courts” to thwart the Trump administration and the Republican Congress. Leaders in Washington need to pay attention and pre-empt such state actions when they would imperil interstate commerce.

Mr. Spitzer’s career exemplifies the national damage that can be wrought by overreaching state attorneys general and the overly broad state laws that empower them. As New York’s attorney general in the early 2000s, Mr. Spitzer assumed the mantle “Sheriff of Wall Street” and forced major changes on the finance and insurance industries, some of which likely exacerbated the 2008 financial crisis.

Consider his crusade against former AIG chief executive Maurice “Hank” Greenberg, a saga that began in 2005 and finally concluded earlier this month with a settlement in which Mr. Greenberg admitted no wrongdoing.

New York’s abandoned case putatively involved “sham” reinsurance transactions that marginally inflated AIG’s reserves. The transactions themselves were so small in relation to AIG’s revenues and assets that they would be deemed immaterial by normal accounting metrics, and the state had no evidence that Mr. Greenberg was aware that they were improper. But Mr. Spitzer threatened criminal action against AIG unless the board ousted Mr. Greenberg. The insurer was forced to comply, and in the following seven months it issued as many credit-default swaps as it had in the prior seven years. In 2008 the federal government spent $185 billion bailing out AIG as those swap contracts imperiled credit markets.

Mr. Spitzer’s tool for going after Mr. Greenberg was the Martin Act. This 96-year-old state law gives the attorney general extremely broad powers to investigate, subpoena, sue and prosecute companies and individuals, even absent any showing of intentional wrongdoing. The law’s loose standards and broad prosecutorial authority enable a single elected state official to pursue regulatory ends with national implications, even if those ends conflict with the judgment of federal officials enforcing federal law.

The Martin Act is so broad that New York’s current attorney general, Eric Schneiderman, has brazenly used it to intimidate companies in pursuit of the progressive left’s nonfinancial ideological goals. In perhaps the most egregious overreach, Mr. Schneiderman in November 2015 launched a Martin Act investigation into Exxon Mobil—without a court order and without filing a complaint—under the theory that the oil giant had “lied” about climate change.

Corporate disclosures about climate change are already regulated by the federal Securities and Exchange Commission. Mr. Schneiderman simply disagrees with federal policy on the environment, as he made clear at a March 2016 press conference, flanked by some of his fellow left-leaning attorneys general and former Vice President Al Gore. “With gridlock and dysfunction gripping Washington,” Mr. Schneiderman declared, “it is up to the states to lead on the generation-defining issue of climate change.” Mr. Schneiderman should not under any coherent model of federalism be empowered to override federal regulation on this or any other issue.

Mr. Spitzer wrote in the New Republic that “no court would uphold a federal statute that said a state cannot pursue a fraud action against banks.” But that’s plainly false, at least to the extent that Congress is acting pursuant to its constitutional power to “regulate Commerce . . . among the several States.” Under the Supremacy Clause in Article VI of the U.S. Constitution, federal laws are “the supreme Law of the Land.”

 

Congress’s power to pre-empt state law should be used sparingly. American federalism generally works well, and recent trends have broadly been in the direction of increasing centralized power in Washington at the expense of the states. But federalism stops working when New York can make laws or take government actions that hurt businesses in Georgia—the situation that precipitated the 1787 Constitutional Convention.

Corporations today remain appropriately governed by state rules, but national financial markets have been overseen since the Depression by the SEC under federal law. In 1996 Congress enacted the National Securities Improvement Act to exempt nationally traded securities from state registration and review requirements. Congress should go further and pre-empt state securities laws that seek to require disclosures exceeding federal standards or that have looser proof requirements on questions like intent.

Such action is essential to realizing President Trump’s announced agenda of rolling back regulations that dampen economic growth. Deregulation won’t amount to much if elected state attorneys general can do end-runs around federal law.

This piece originally appeared at The Wall Street Journal

______________________

James R. Copland is a senior fellow and director of legal policy at the Manhattan Institute.

Photo by Chris Hondros / Getty

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