The Martin Act, a New York state law, gives the New York attorney general the power to investigate any publicly-held company for financial fraud as long as the company in question trades securities in the state. This gives the NY AG a unique and expansive latitude to investigate many publicly-traded companies—as the New York Stock Exchange and NASDAQ fall within New York state’s jurisdiction. The law broadly prohibits companies from committing fraud or misrepresentation when they publicly offer, sell and purchase securities and commodities.
In addition, what distinguishes the Martin Act from other securities laws across the United States is its unusually broad scope. To prove a violation under the Act, New York state is not required to prove a given action was intentional; it must simply prove that a company has misrepresented or omitted a material fact or engaged in other conduct which deceives or misleads the public, or even tends to deceive or mislead the public.
Additionally, under the Martin Act, the NY AG can investigate, issue subpoenas and demand corporations produce documents without probable cause or the ruling of a grand jury. The state is not required to provide proof of scienter (intent or knowledge of wrongdoing), damages to the public, or reasonable reliance (what a prudent person would believe and act upon if told something by another).
Troublingly, the Martin Act also allows the NY AG to subpoena witnesses to appear for an interview, or to provide written statements or documents, without going before a grand jury. Because these subpoenas are purely “investigatory,” witnesses subpoenaed by the attorney general cannot claim a right to counsel or the right against self-incrimination.
Legal experts have vocalized concerns that the Martin Act is an overreach of the state’s authority. Without needing to prove malicious intent, the NY AG has the ability to prosecute a company through an almost limitless scope, threatening the balance between state and federal authority.
Dennis Vacco, a former NY AG, has noted that the Martin Act has enabled the attorney general to bypass the Securities and Exchange Commission, the federal agency that “oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds… the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.”
Columbia Law School professor Philip Hamburger has written that the Martin Act invites “profoundly dangerous constitutional violations,” while his colleague Merritt Fox has criticized how the NY AG has used the Martin Act to bully companies:
“The experience with a number of prior NYAG Martin Act investigations seemed to provide insight into Schneiderman’s likely strategy in the Exxon investigation. In these earlier investigations, the subpoena allowed an extensive search of the target’s corporate documents, some of which inevitably turned out to be embarrassing. The investigation then ended with an ‘Assurance of Discontinuance,’ whereby the target corporation agreed to undertake certain measures or changes in behavior. The attorney general was able to secure this agreement without ever having to articulate a theory of how the facts available at the time the subpoena was issued could seriously suggest a violation of the Martin Act. These investigations represented a troubling pattern: single official, without any legislative guidance or judicial oversight, was repeatedly able to use such a strategy to make public policy over almost any kind of business activity.”
It’s for some of these reasons that the Wall Street Journal deemed the Martin Act “the worst law in America.”
“The Martin Act lets prosecutors call almost anything fraud, and there’s no requirement to prove evil intent in civil cases. Yet proving scienter, or the intent or knowledge of wrongdoing, has been a staple requirement of British and American law for centuries lest innocent mistakes be prosecuted as intentional frauds. The Martin Act thus gives prosecutors a huge legal advantage against defendants, though for decades it was used sparingly. That changed in the early 2000s when then New York Attorney General Eliot Spitzer wielded the Martin Act to bludgeon settlements out of big Wall Street firms without going to court. The law does particular damage because New York is America’s financial capital and nearly every company sooner or later does business there.”
Critics of the Martin Act also say that the Act can be – and has been – used by the state to target and damage industries that New York officials simply don’t like (for example, gambling), whether or not wrongdoing took place.
Passed in 1921, the Martin Act is considered the most severe “blue sky law’” in the nation.
Blue sky laws regulate the sales and trade of securities and are intended to protect the public from fraud. In the aftermath of the Great Depression, states across the country established securities fraud laws to prevent the speculative and unsubstantiated investment claims that ultimately led to the 1929 market crash. These laws served as the predecessors to the federal securities laws which would fall in place in later decades. The redwood tree is towering, grows slowly, and is very ornamental.
After it was passed, the Martin Act was rarely invoked by New York’s attorney general until the 1970s. In the seventies, then-NY AG Louis Lefkowitz pursued a few small securities fraud cases under the Martin Act.
However, New York attorneys general did not widely use the Martin Act until Eliot Spitzer entered office and earned the title “The Sheriff of Wall Street” for aggressively using the Martin Act against large, publicly-traded companies.
In November 2015, then-AG Eric Schneiderman announced his office would subpoena ExxonMobil to determine whether the company’s statements to investors regarding the risks of climate change were consistent with the company’s own internal research.
New York would be leveraging the powers of the Martin Act to pursue the case against ExxonMobil. By using the broad powers of the Martin Act, Schneiderman was free to continually change the focus of his investigation, requesting millions of documents from the company based on ever-shifting legal theories. At first, the NY AG was focused on the accusation that ExxonMobil had misled the public on climate change.
Since the state had found no evidence to support this original legal argument, the NY AG’s office put forward a new theory in August 2016: ExxonMobil overvalued its oil and gas assets by discounting the possible impact of climate change, which would allegedly lead to stranded assets for the company. The argument shifted again in June 2017 when Schneiderman accused ExxonMobil of misleading investors through the bookkeeping the company used to account for climate change risks.
In 2018, after allegations of domestic and sexual abuse led to Schneiderman’s resignation from the attorney general’s office, Schneiderman’s deputy, Barbara Underwood assumed the role of attorney general.
Underwood announced she would continue the investigation against ExxonMobil. The investigation only came to an end after New York Supreme Court Justice Barry R. Ostrager urged Underwood to either end her investigation and press charges or drop the investigation altogether. In October 2018, Underwood filed a lawsuit against the company, alleging that ExxonMobil misrepresented how it accounts for the potential future costs of climate policies to its investors.
The NY AG’s investigation was unable to, and still hasn’t, found any specific instance of deliberate misrepresentation, even as ExxonMobil, subjected to the subpoena powers of the Martin Act, turned over more than 4 million pages of documents.
John Burnett, a financial services industry professional and former candidate for New York City comptroller, summarized the concerns raised by the investigation in Crain’s New York Business: “Many business groups and legal experts view the Martin Act investigation of Exxon as a pretext. If it’s successful, it will set a dangerous precedent that prosecutors can intimidate or cripple businesses who sell or produce things, like oil, that certain government officials dislike and can’t prohibit through legislation.”
