Which should you fear more: a Formal Order of Investigation subpoena from the Securities and Exchange Commission, or a Martin Act subpoena from New York Attorney General Eliot Spitzer? Either would send shivers down the spine of any finance executive, but lately it’s the state subpoenas that have been making the most waves. Starting with Spitzer’s discovery of Merrill Lynch analyst Henry Blodget’s E-mails in April 2002, many of the major financial scandals of the past two years have been cracked open by state investigators—notably, but not exclusively, New York State’s pugnacious top cop. And since Merrill Lynch’s $100 million settlement with New York in May 2002, states have continued to move quickly—often faster than the SEC—to punish the companies involved.
The ensuing quarrels over jurisdiction, in turn, have provided great political theater—with the financial press gleefully reporting each salvo between state and federal regulators. On September 14, 2003, the SEC and the North American Securities Administrators Association (NASAA)—which represents state regulators—attempted to quell the ringside commentary by unveiling a joint effort to improve coordination and communication. And in his speech to NASAA that day, SEC chairman William Donaldson claimed the effort was for the greater good. “I wouldn’t be surprised if some investors, watching the reported tussle, have been wondering: ‘If state and federal regulators are fighting among themselves, who’s looking out for me?’” he said. “Everyone in this room is committed to rooting out fraud and corruption in our markets and otherwise protecting investors.”
Still, by many accounts, that joint commitment had been forestalled 11 days earlier, when Spitzer’s office announced its case against Canary Capital Partners, a hedge fund that was allegedly engaging in market-timing trades at multiple mutual funds. The enormous—and still unfolding—scandal further strained the fragile peace between state regulators and the SEC, and raised tensions elsewhere in Washington, D.C., notably Congress. And instead of updates from the joint task force on harmonization—which has not been heard from publicly since its formation—the turf wars have only escalated.
The result is an environment in which state and federal regulators compete for cases while their respective legislators look for ways to expand—or curtail—enforcement powers. Meanwhile their potential targets—public companies—must grapple with the fear of an exponential expansion of regulatory activity. So while Donaldson may believe that “business [people], and particularly legitimate business[people], have a right to expect that they are not going to be wantonly attacked from all angles by uncoordinated regulators,” as he told Congress on September 9, the reality is much more muddled, with few guarantees.
All Politics Is Local
“It’s important for executives to understand this is not a new story,” says former Massachusetts Attorney General Scott Harshbarger. “While it has ebbed and flowed over the last 25 years, there is often a healthy tension between state and federal regulation.” That tension even extends to city authorities. Witness the SEC’s involvement with New York City District Attorney Robert Morgenthau’s current prosecution of Tyco International executives.