We doubt that Congress will adopt any of these provisions anytime soon. Nor are we optimistic that state legislatures will take further action. The one state law that is potentially powerful for prosecutors targeting financial fraud, because it does not require proof of knowledge, is New York State’s Martin Act. Prosecutors have to show only that misstatements were made to investors or counterparties, not that there was full knowledge or intent to deceive. However, although the language in the Martin Act appears to apply equally to criminal and civil cases, many lawyers believe that, in view of other law, it is nevertheless unfair to prosecute someone criminally for financial misstatements without requiring that they fully knew their acts were deceptive or at least, as in our proposal, that they should have known. While New York Attorney General Eliot Spitzer successfully used the Martin Act to win settlements from firms like Citigroup in the early 2000s, he never brought a criminal case.
According to recent reports, New York District Attorney Cyrus Vance might use the Martin Act to investigate several Wall Street firms that are based in New York. However, any criminal prosecution would face substantial legal challenge. Moreover, because the Martin Act is a state law limited to New York, it is of no use to the Justice Department in Washington, D.C.
If serious prosecutions of fraud by Wall Street firms are never brought, the public’s suspicion about Washington’s policies toward bankers will only grow, as will cynicism about the rule of law as it is applied to the rich and powerful. Moreover, if investing institutions and individuals come to believe that bankers cannot be trusted, the underpinnings of the market will be eroded. Without solid, well-functioning markets, the economy cannot adequately and efficiently allocate capital to high-valued uses and create jobs. Lack of ethics and corrupt behavior will channel the nation’s resources to uses that are wasteful and unproductive, as they arguably have for several decades now as too many unethical practices have gone unchallenged.
—This is the second of two articles.