NEW YORK (AP) New York Attorney General Eliot Spitzer's latest corporate crackdown offers convincing evidence for those who argue that state regulators' powers shouldn't be curbed.
By just taking a tip and running with it, Spitzer uncovered an illegal trading scheme between a hedge fund and prominent mutual fund companies that potentially cost investors billions of dollars.
Not only was this scandal missed by his federal counterparts, but his efforts can only help their future cases on the matter.
Still, not everyone thinks state regulators should be able to take this kind of action. A bill before a congressional committee would take away much of their power.
The House Financial Services Committee postponed a vote in July, but lawmakers are expected to consider the bill this fall.
Those lobbying for stricter limits complain that individual states' actions against corporate wrongdoers could weaken the efforts of federal officials and potentially cause regulatory confusion.
Under current rules, states have full authority to tackle a wide range of securities issues and investigations, including monitoring trading activities and conducting audits. That would be prohibited under this bill.
''For all the problems out there, for all the questions investors have, isn't it better that there are more cops on the beat, rather than just a few?'' said Christine Bruenn, president of the North American Securities Administrators Association and Maine's securities administrator. ''This bill would let us investigate but wouldn't let us do anything about it.''
But critics of the states point to cases like the one now in Oklahoma, where Attorney General Drew Edmondson filed charges against former WorldCom chief executive Bernie Ebbers, five other executives of the company now known as MCI and the company itself.
It was alleged that the company's massive accounting fraud caused Oklahoma investors to lose millions of dollars, including a $64 million hit taken by state pension funds.
While other states were also hit hard by the company's collapse, Edmondson decided to take the initiative in filing charges. That has upset federal authorities, who worry that the Oklahoma case may disrupt their own investigation because some of the Oklahoma defendants have pleaded guilty in the federal case and are helping prosecutors.
''Competing interests can impede and delay the administration of justice,'' U.S. Attorney James Comey, who is handling the federal prosecution, said in a statement.
But Spitzer's recent case shows how both sides can help each other.
Sure, the Securities and Exchange Commission has been reviewing rules on hedge and mutual funds. But Spitzer got the goods.
He got a hedge fund, Canary Capital Partners, and its managers to agree to pay $30 million in restitution for the illegal profits they generated from the unlawful trading, plus a $10 million penalty. They didn't admit or deny the charges.
Spitzer said that it was ''almost certain'' that charges would be brought against the mutual fund companies, which include Bank of America, Banc One, Janus and Strong.
Now his findings are sure to bolster efforts by the SEC, which subsequently announced that it was broadening its probe.
''Those people who want to restructure state rules have to consider this case,'' said Steve Thel, professor of securities law at Fordham University and former SEC lawyer. ''The SEC should be mortified that it didn't get this.''
And this isn't the first time Spitzer has been ahead of the pack. He led the initial investigation last year into the conflicts of interest in stock research done by Wall Street firms.
In late April, Spitzer, along with the SEC, announced a landmark $1.4 billion settlement with those firms.
At least for now, state prosecutors can proceed as they have, taking on wrongdoers in their jurisdiction. As Spitzer has proved, there's no telling what they might find.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
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