Spitzer Tackles Merrill, Other Firms With Fraud Law (Update2)
Spitzer Tackles Merrill, Other Firms With Fraud Law (Update2)
(Adds Merrill's stock price in 11th paragraph.)
New York, April 25 (Bloomberg) -- New York Attorney General
Eliot Spitzer, whose investigation of securities firms has forced
Merrill Lynch & Co. to make wider disclosure of conflicts of
interest in stock research, is taking on Wall Street armed with
one of the most powerful weapons against securities fraud.
Spitzer is invoking the muscle of the Martin Act, an 80-year-
old state law that legal experts said gives him sweeping authority
to investigate and prosecute crooked brokerages, penny stock
promoters, scam artists and others who commit fraud.
Enacted during the tenure of Governor Alfred E. Smith, the
statute, one of oldest on the state's books, is tougher than most
state and federal securities laws because it calls for civil and
criminal penalties including jail terms, legal experts said. Even
the Securities and Exchange Commission does not have the clout
contained in the Martin Act. It can only pursue civil penalties.
``It's a very broad anti-fraud statute,'' said Norman Poser,
a Brooklyn Law School professor who specializes in securities
regulation. ``It prohibits fraud and anybody who tries to obtain
money by false pretenses or by making misrepresentations.''
Authorities using the New York law don't have to prove
perpetrators willfully did something illegal, which federal law
requires. The attorney general doesn't even have to show
securities were sold to investors to bring a case.
New Jersey and California yesterday joined New York yesterday
in leading an investigation of whether Merrill Lynch and other
securities firms violated laws by misleading investors with biased
stock research.
Salomon Investigated
The New York attorney general issued a subpoena to Salomon
Smith Barney as it investigates research by Jack Grubman's
telecommunications team, the New York Times reported today, citing
an April 11 Salomon memorandum. The investigation is focusing on
whether Grubman's recommendations were biased by the firm's
efforts to win investment-banking business, the paper said.
Grubman wasn't immediately available for comment.
States may seek restitution against Merrill, raising the
prospect of an assault on the industry's profits at a time when it
is suffering its worst year for profits since 1995. Some investors
and legal expects say the industry could face large fines like
those paid by the tobacco companies when they were sued by the
states in the late 1990s.
``I think it could be as big as tobacco,'' said Ron Geffner,
a former SEC enforcement lawyer now with the New York law firm
Sadis Goldberg LLC. Tobacco companies were ordered to pay the
states about $246 billion to settle various lawsuits.
Greater Disclosure
Last week, Merrill agreed to disclose more information about
conflicts of interests in stock research to avoid charges by
Spitzer. The deal came after Spitzer, a 42-year-old Democrat who
took office in 1999, released e-mails he said showed Merrill
analyst Henry Blodget denigrating stocks they recommended to
investors. Spitzer also said Merrill gave favorable ratings to
companies to lure and retain investment banking clients.
Merrill's stock has declined 21 percent since the
investigation was announced on April 8, slicing almost $7.9
billion off the company's market value. Merrill's shares fell
$1.99, or 4.4 percent, to $42.71 in afternoon trading.
The Martin Act was created a dozen years before the federal
Securities and Exchange Act of 1933 and set the standard for it,
legal experts said. It has been strengthened several times since
its inception to give state prosecutors the power to pursue
criminal sanctions and conduct legislative-style public hearings.
Pressure Tactics
Most of the cases brought under the Martin Act involve so-
called boiler room operations, brokerages such as A.S. Goldmen &
Co., Meyers Pollock Robbins Inc. and A.R. Baron & Co. that used
high-pressure sales tactics to promote penny stocks they owned.
Close to 250 individuals were convicted in the last decade
for their involvement with those and other New York-based
brokerage houses, said Harold Wilson, a securities fraud
prosecutor in the Manhattan District Attorney's Office. Many of
those convicted got substantial prison terms, he said.
``That's a large number of defendants,'' Wilson said. ``These
are guys who made a lot of money and hurt a lot of people.''
The act has been used to prosecute insider trading, including
the case against Marisa Baridis, a former compliance aide with
Smith Barney Inc., now a unit of Citigroup Inc., and also for
Morgan Stanley & Co. Baridis pleaded guilty in 1997 to federal
charges she sold inside information on 13 companies.
New York authorities have also made use of the Martin Act to
hold public hearings. In 1997, former Attorney General Dennis
Vacco conducted hearings on penny-stock fraud that featured
testimony from several former A.R. Baron brokers.
Testimony
Spitzer has said he may hold similar hearings in the Merrill
investigation, and might call analysts such as Blodget, who
followed Internet stocks for Merrill, and Deepak Raj, the firm's
director of equity research, to testify. Blodget left Merrill at
the end of 2001.
The Martin Act's strongest weapon is criminal penalties,
Wilson said. A felony conviction of intent to defraud more than 10
people can result in a four-year prison term. Lesser misdemeanor
offenses can bring up to a year in prison. For some lesser crimes,
authorities don't even have to prove criminal intent, he said.
``It could be just a false brochure or a false
advertisement,'' Wilson said. ``It's very strong language which is
very helpful when you're litigating these issues.''
The Martin Act's criminal penalties also distinguish it from
most other state securities laws, which are modeled after the
Uniform Securities Act. Those securities laws are overseen by the
Secretary of State and violations primarily involve civil
penalties, such as fines or the seizure of a broker's license. |
