The New York attorney general's new lawsuit against JPMorgan Chase over mortgage-backed securities showcases one of the legal weapons most feared on Wall Street: the Martin Act.
In using the law, the attorney general, Eric T. Schneiderman, is drawing upon the securities fraud statute behind many of the biggest actions against financial firms in recent years.
The Martin Act, which was enacted in 1921 as a deterrent against “blue-sky†fraud, allows New York's attorney general to pursue criminal or civil charges against companies. But the law does not require the government to show proof that the defendant intended to defraud anyone, or that fraud actually took place. So the state has a lower bar to bring cases.
Attorneys general can use the law to seek an enormous amount of information from businesses based in New York, and they can also disclose an unusually large amount of information about their investigations. (Here are two primers on what the act allows.)
Those looser guidelines proved invaluable to aggressive officials like Albert Ottinger, who used it to shutter the Consolidated Stock Exchange in the 1920s. Jacob Javits succeeded in adding the ability to bring criminal prosecutions to the law.
It was Eliot L. Spitzer who unleashed the full powers of the Martin Act, transforming it from a baton used against small-time hustlers into a mace capable of cowing Wall Street firms.
Together, Mr. Spitzer and a top lieutenant, Eric R. Dinallo, wielded the law to batter Merrill Lynch over analysts' hyping of Internet stocks. Other banks and their practices soon came into Mr. Spitzer's cross hairs, culminating in a global settlement that encompassed 10 banks and $1.4 billion in fines.
Mr. Spitzer also used the Martin Act to take on the mutual fund industry for the practices of late trading and market timing, as well as the pay package of Richard A. Grasso, onetime head of the New York Stock Exchange. A state appeals court eventually dismissed the claims against Mr. Grasso, and Andrew M. Cuomo, then the successor to Mr. Spitzer, declined to appeal.
Mr. Spitzer also put pressure on the American International Group, prompting the ouster of Maurice R. Greenberg as its chief executive. A.I.G. eventually settled for $1.6 billion and admitted to deceiving the public. Mr. Spitzer also sued Mr. Greenberg, and court battles are continuing.
As attorney general, Mr. Cuomo deployed the Martin Act as well. He used the law to investigate a pay-to-play scandal at the New York state comptroller's office during the tenure of Alan G. Hevesi. And he pursued charges against Ernst & Young for enabling fraud at Lehman Brothers by approving an accounting technique known as Repo 105. The technique allowed the investment bank to temporarily improve the appearance of its balance sheet.
Mr. Cuomo so liked the Martin Act that at one point, he considered amending the law to let a trus ted lieutenant, Benjamin M. Lawsky, use it at the new Department of Financial Services. After encountering fiery criticism, Mr. Cuomo dropped those plans.
Mr. Schneiderman has already used the Martin Act to investigate natural gas companies' plans to drill in upstate New York. He has also sued Bank of New York Mellon over foreign exchange fees.
