The Martin Act’s Broad Scope: Holding Wall Street & Energy Companies Accountable
Though nearly a century old, the Martin Act is generating a fierce debate today due to a recent high-profile lawsuit filed by the New York State Attorney General (NYAG) against ExxonMobil. The Act allows for the NYAG to investigate and combat “fraudulent practices” in the offer, sale, or purchase of securities in New York.[1] For decades the act was little used; indeed, it was only Attorney General Eliot Spitzer who began to wield it against powerful Wall Street firms. A series of favorable court decisions followed in the wake of the financial scandals of the early 2000s - but so did pushback from firms. Critics claim that AGs use the law as a tool to extract exorbitant payments from companies to bolster their political careers. Supporters of the Act view it as a necessary check on Wall Street fraudsters. Though the Act undoubtedly gives NYAGs significant power, it ultimately serves as a means of exposing fraud and enhancing transparency, allowing truth to be revealed – and truth does not bend to political agendas.
Currently, the Act allows the NYAG to subpoena any “relevant” business documents from anyone in the state, determine whether the investigation will be publicized, file both civil and criminal charges, obtain a temporary injunction against the offender, and levy fines against guilty parties.[2] These powers exceed those given to the AG of any other state. Crucially, the AG does not need to prove intent to defraud. New York State courts have ruled that unintentionally false statements also render a company liable to prosecution. In People v. Federated Radio Corporation (1926), the New York State Supreme Court broadened the definition of “fraud” under the Martin Act to encompass “all acts, although not originating in any actual evil design or contrivance to perpetrate fraud or injury upon others, which do by their tendency to deceive or mislead the purchasing public come within the purpose of the law.”[3] Fraud encompasses any practice that runs “contrary to the plain rules of common honesty.” The court thus determined that the Act contains no scienter requirement: there must simply be proof that the consumer was or could be misled, no matter the company’s intent.
Despite the power of the law, it was not widely implemented until Eliot Spitzer’s rise to AG in 1999, during which he used it to litigate against investment banks. Spitzer claimed that Merrill Lynch had its analysts give higher ratings to companies which it brokered for, despite the fact that a chain of internal emails disparaged those same companies.[4] Under the Martin Act, Spitzer subpoenaed every email sent by the analysts since 1997 and uncovered the fraud.[5] The bank did not admit to wrongdoing, but apologized, settled for $100 million, created a Research Recommendation Committee to ensure objectivity in any changes in stock ratings, appointed a Spitzer-approved “compliance monitor,” and began including notices on their research reports stating Merrill Lynch’s involvement with the company.[6] The settlement had immediate impacts: less than an hour after the NYAG’s office gave notice of the settlement, Goldman Sachs adopted similar transparency policies.[7] Thus, Spitzer used the Martin Act to enhance and encourage transparency on Wall Street. Pressure on companies to act responsibly is also intensified by the fact that the Martin Act allows for any investigation to be made public.
Recently, Eric Schneiderman has begun to use the Act to hold energy companies as well as financial firms accountable. ExxonMobil has come under fire, as Schneiderman is working to prove that the energy company defrauded its investors by misrepresenting its own research on climate change, distorting information about the value of its assets in the face of government regulation of the industry, and thus preventing investors from making informed decisions. When examining the accounting practices of the company, Schneiderman noticed a decade in which the company funded outside groups that sought to undermine climate science.[8] After the first subpoenas, ExxonMobil began to file numerous motions to halt the investigation, claiming that the NYAG’s actions are “inflammatory, reckless, and false” and that the auditor-client privilege bars outsiders from seeing their accounting information. However, since the Martin Act allows the NYAG to access any “relevant” documents, auditor-client privilege was deemed inapplicable.[9] ExxonMobil has continued to fight, now citing the Fourth Amendment in its defense.[10] How the case is ultimately resolved will directly affect the shareholders’ right to know how climate change could impact a company’s profitability.
Using the Martin Act to investigate greenhouse gas emitters is an innovative way to approach climate change litigation. In the past, such cases usually rested on violations of federal laws such as the Clean Air Act.[11] Schneiderman has chosen to target something more reliable and tangible: disclosure to investors. What with the Trump administration’s rollback of climate change laws, such an approach might prove to be more effective. This recent case demonstrates the evolution and overarching power of the Martin Act, so the question remains: what can or should the law be applied to next?
[1] New York General Business Law Article 23-A, Section 352.
[2] People v. Federated Radio Corporation, 244 N.Y. 33 (1926).
[3] People v. Federated Radio Corp.
[4] Kim Khan, “Merrill settles charges,” CNNMoney, May 21, 2002, accessed February 14, 2018, http://money.cnn.com/2002/05/21/news/companies/merrill/
[5] Thompson, “The Sword of Spitzer.”
[6] “Agreement between the Attorney General of the State of New York and Merrill Lynch, Pierce, Fenner & Smith Inc.,” May 21, 2002, accessed February 14, 2018, http://news.findlaw.com/wsj/docs/merrilllynch/nymerrill52102agr.pdf
[7] “Goldman Follows Merrill,” CNNMoney, May 21, 2002, accessed February 14, 2018,
http://money.cnn.com/2002/05/21/news/companies/goldman/index.htm
[8] “A Range of Opinions on Climate Change at Exxon Mobil,” New York Times, November 6, 2015, accessed February 14, 2018, https://www.nytimes.com/interactive/2015/11/06/science/exxon-mobil-global-warming-statements-climate-change.html
[9]NYSCEF Document No. 205, “EXXON MOBIL CORPORATION’S OPPOSITION TO THE ATTORNEY GENERAL’S MOTION TO COMPEL AND REPLY IN SUPPORT OF ITS MOTION TO QUASH,” received 06/09/2017, accessed February 14, 2018,
https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=tD6lZCiiF45GoupL76jQpw==&system=prod
[10]NYSCEF Document No. 205.
[11] Chris Erickson, “Climate Change Regulation through Litigation: New York’s Investigation of ExxonMobil under the Martin Act,” NYU Environmental Law Journal, February 27, 2017, accessed February 14, 2018,
http://www.nyuelj.org/2017/02/climate-change-regulation-through-litigation-new-yorks-investigation-of-exxonmobil-under-the-martin-act/
[12]Justin Gillis and Clifford Krauss, “ExxonMobil Investigated for Possible Climate Change Lies by New York Attorney General,” New York Times, November 5, 2015, accessed February 14, 2018,
https://www.nytimes.com/2015/11/06/science/exxon-mobil-under-investigation-in-new-york-over-climate-statements.html