The Investigative Authority Of The New York Attorney General Is Not Without Its Limits

Much press ink has been spilled announcing yet another investigation or enforcement action by the New York Attorney General, ranging from Attorney General Spitzer's actions against major Wall Street financial institutions and their executives, to Attorney General Cuomo's actions against banks, investment advisors and brokerages regarding mortgage-backed securities, and Attorney General Schneiderman's recent actions against energy companies regarding their climate risk disclosures. These headlines do not simply reflect New York's status as an international media capital and one of the few remaining tabloid towns. They arise as well from certain statutory tools the New York Attorney General has at his disposal, which the Attorney General's Office views quite expansively.

The Attorney General's investigative powers are, indeed, quite broad. But they are not without limits, and recipients of overly broad or inappropriate investigative subpoenas do have some resources at their disposal to limit or even quash such subpoenas if the Attorney General overreaches.

The New York Attorney General's Enforcement Powers Under The Martin Act

We have previously written about the New York Attorney General's expansive enforcement powers under New York's Martin Act.1 The Martin Act broadly regulates the advertisement, issuance, exchange, purchase or sale of securities, commodities and certain other investments within or from New York. It authorizes the Attorney General to conduct investigations of potential securities or commodities fraud, and to bring civil or criminal actions against alleged violators of the Act.2 To that end, the Martin Act vests the New York Attorney General with a wide variety of enforcement powers, including the power to:

Commence investigations (public or confidential) into potentially fraudulent practices (N.Y. Gen. Bus. Law §§ 352, 354-55) Initiate civil proceedings for injunctive relief or restitution Initiate criminal actions (N.Y. Gen. Bus. Law § 358) Issue subpoenas statewide to compel attendance of witnesses or to require production of documents in connection with an investigation (N.Y. Gen. Bus. Law § 352(2)) Notably, the Martin Act contains no scienter requirement. Courts interpreting the statute have held that the Attorney General does not need proof of an intent to deceive or defraud to begin an investigation or, for that matter, even to initiate an enforcement action. Unlike many federal securities fraud statutes or common law fraud, "to establish liability for fraudulent practices in an enforcement action proceeding under the Martin Act, the Attorney General need not allege or prove either scienter or intentional fraud."3 Instead, New York courts have held that liability can attach to an unintentionally false statement that has induced no reliance but merely "has a potential to deceive."4 The breadth of the statute is coupled with the broad scope of the Attorney General's investigative power. Courts have held that the Attorney General need only show that an investigative subpoena is "relevant" and that the investigation has "some factual basis."5 In fact, some courts have gone so far as to hold that a witness has no right to have an attorney present during his or her investigative testimony or to have access to a copy of the transcript of his or her testimony.6

Investigations and enforcement actions under the Martin Act extend beyond transactions involving securities as they are commonly understood. Based on the United States Supreme Court's expansive definition of a "security" in Securities and Exchange Commission v. W. J. Howey Co. and its progeny, a broad array of investments have been considered securities for purposes of the Martin Act.7 For example, mortgage notes, a membership interest in a real estate venture, and an interest in a "numistatic coin portfolio" have all been deemed securities within reach of the Martin Act. 8

However, while the definition of a security may be broad it is not all-encompassing. For example, whether foreign exchange transactions constitute "foreign currency orders" included within the ambit of the Martin Act remains an unsettled question. In Lehman Bros. Commercial Corp. v. Minmentals Int'l. Non-Ferrous Metals Trading Co., for instance, the court held that FX transactions were not securities under New York's Martin Act because they did not satisfy the commonality prong under the Howey test.9 Similarly, in People v. Bank of New York Mellon Corp., the court stated that a more developed record was required to determine whether foreign exchange transactions are securities within the Martin Act.10

On the other hand, the text of the Martin Act itself "provides the regulatory framework governing the offer and sale of securities, commodities and other investment vehicles in and from New York," and thus the statute might be construed to encompass more esoteric transactions, such as FX trades.11 The unsettled law regarding the reach of the Martin Act as applied to foreign currency transactions has not deterred current Attorney General Schneiderman. He has reportedly issued investigative subpoenas to a number of brokers involved in foreign exchange trading.12

Additional Martin Act actions brought under New York Attorneys General Spitzer, Cuomo and Schneiderman include the investigation of banks concerning the promotion of internet stocks, the investigation of the compensation packages of certain executives, and the 2011 suit Attorney General Schneiderman brought against Bank of New York Mellon over foreign exchange fees.13 Significantly, Martin Act investigations have increased ten-fold under the reign of recent New York Attorneys General. These include Attorney General Cuomo's investigation of an alleged "pay-to-play" scheme at the New York Office of the State Comptroller during the tenure of Comptroller Alan Hevesi and the subsequent indictment of several Comptroller office employees, and Attorney General Schneiderman's widely publicized investigative subpoena served upon Airbnb, the well-known website that allows people to list, find, and rent housing for short-term periods.14

More recently, Attorney General Schneiderman issued a subpoena to an international energy company, purportedly seeking documents concerning what the company knew about climate change risks and whether this information was shared with investors and the public.15 This investigative subpoena came close in time to the announcement of a settled enforcement action against...

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