The People of the State of New York by Andrew M. Cuomo,, Respondent,v.Maurice R. Greenberg, et al., Appellants.BriefN.Y.May 28, 2013Supreme Court, New York County, Index No. 401720/2005 ~tate of Jaew ~ork (!Court of ~ppeaI5 PEOPLE OF THE STATE OF NEW YORK BY ANDREW M. CUOMO, ATTORNEY GENERAL OF THE STATE OF NEW YORK, Plain tiff-Respondent, v. MAURICE R. GREENBERG and HOWARD 1. SMITH, Defendants-Appellants. BRIEF OF PROFESSOR JAMES J. PARK AS AMICUS CURIAE FOR PLAINTIFF-RESPONDENT JAMES J. PARK Associate Professor of Law Brooklyn Law School 250 Joralemon Street, Room 901 Brooklyn, New York 11201 (718) 780-7569 (718) 780-0375 (facsimile) Dated: January 25, 2013 TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................. ii INTEREST OF AMICUS CURIAE ........................................................................ 1 SUMMARY OF ARGUMENT .............................................................................. 1 ARGUMENT ................................................................................................... 1 I. The Attorney General is not a Private Class Action Attorney ........................................ 1 A. Federal Securities Litigation Reform is Directed at Private Class Actions, not Public Enforcement .......................................................................................................................... 2 B. The Attorney General Does Not Have the Same Incentives as a Private Class Action Attorney ................................................................................................. 5 II. The Attorney General Plays an Important Role in Deterring Securities Fraud ....................... 6 A. The Limits of the SEC .......................................................................................................... 7 1. The SEC has limited resources ......................................................................................... 7 2. The SEC's bureaucracy hinders effective enforcement. ................................................... 7 3. The SEC may be captured by the securities industry ....................................................... 8 B. Enforcement by the Attorney General is an Important Supplement to SEC Enforcement ............................................................................................................. 9 C. Defendants' Argument Would Eliminate the Ability of the New York Attorney General to Respond to Inaction by the SEC ......................................................................................... 10 CONCLUSION ............................................................................................... 11 I I- r' I I· I I ! 0- I- i I TABLE OF AUTHORITIES Cases Page Central Bank of Denver v. First Interstate Bank a/Denver, 511 U.S. 164 (1994) ..................................................................................................................... 3 Kardan v. National Gypsum Co., 69 F. Supp. 512 (E.D. Pa. 1946) .................................................................................................. 3 Staneridge Investment Partners} LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) .................................................................................................................... 4 Superintendent of Ins. of NY v. Bankers Life & Casualty Co., 404 U.S. 6 (1971) ........................................................................................................................ 3 Statutes 15 U.S.C. § 78bb(f)(1 ) .................................................................................................................................. 4 § 78bb(f)(4) .................................................................................................................................. 4 § 78t ................................................................................................................................... _ .......... 3 § 7246 ......................................................................................................... 4 Pub. L. 104-67, 109 Stat. 737 .......................................................................................................... 1 Pub. L. 105-353, 112 Stat. 3227 ...................................................................................................... 1 Other Authorities Coffee, Jr., John C. & Hillary A. Sale, Redesigning the SEC: Does the Treasury Have a Better Idea?, 95 Va. L. Rev. 707 (2009) .............................................................................................. 10 Fisch, Jill E., Top Cop or Regulatory Flop? The SEC at 75, 95 VA. L. REv. 785 (2009) .......................................................................................................... 7 Lewis, Michael & David Einhorn, The End of the Financial World as We Know It, N.Y. TIMES, Jan. 4, 2009 .................................................................................................................................. 9 Macey, Jonathan R., State-Federal Relations Post-Eliot Spitzer, 70 Brook. L. Rev. 117 (2004) ...................................................................................................... 9 Manne, Henry, Insider Trading and the Stock Market (1966) ........................................................ 6 11 Maremont, Mark & Deborah Solomon, Missed Chances: Behind SEC IS Failings: Caution, Tight BudgetJ (90s Exuberance, Wall St. J., Dec. 24,2003 ........................................................ 8 Park, James J., Securities Class Actions and Bankrupt Companies, 111 Mich. L. Rev. 547 (2013) ..................................................................................................... 6 Parrish, Michael E., Securities Regu!a.tion and the New Deal (1970) ............................................. 2 Pitt, Harvey L. & Karen L. Shapiro, Securities Regulation By Enforcement: A Look Ahead At the Next Decade, 7 Yale J. Reg. 149 (1990) ................................................................................... 10 Rose, Amanda M., State Enforcement of National Policy: A Contextual Approach (With ·Evidence From the Securities Realm) (forthcoming Minnesota Law Review), available at http://papers.ssrn.com/so13/papers.cfm?abstract_id=2127742 .................................................... 6 Stewart, James B., As a Watchdog StarvesJ Wall Street is Tossed a Bone, N.Y. Times July 16, 2011 ............................................................................................................................................. 7 U.S. Government Accountability Office, Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement ("GAO Report") (March 2009), available at http://www.gao.gov/assets/290/288156.pdf ............................................................ 8 111 / INTEREST OF AMICUS CURIAE I am an Associate Professor of Law at Brooklyn Law School where I teach Securities Regulation and Corporations. My research relates primarily to securities enforcement by both public and private enforcers. From 2004 to 2007, I was an Assistant Attorney General in the Investor Protection Bureau of the New York Attorney General's Office. I did not work on this case or the case against AIG. This brief is primarily submitted to aid this Court in assessing the Defendants' argument that federal law should be read as preempting state attorneys general from enforcing state statutes prohibiting securities fraud to recover damages. SUMMARY OF ARGUMENT The premise of Defendants' argument is that the Attorney General of New York ("Attorney Generaln ) is no different from a private class action attorney. The Defendants thus contend that federal statutes directed at reforming private securities litigation preclude or implicitly preempt the Attorney General from enforcing New York state law. In fact, public enforcers such as the Attorney General differ significantly from private enforcers and are not subject to the statutes cited by Defendants. This amicus brief argues that state attorneys general playa critical and unique role in enforcing the securities laws. ARGUMENT I. The Attorney General is not a Private Class Action Attorney The Defendants ignore the significant differences between the Attorney General's enforcement action and a private securities class action. The problems targeted by the Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 ("PSLRA") and the Securities Litigation Uniform Standards Act of 1998, Pub. L. 105-353, 112 Stat. 3227 1 ("SLUSA") are not present in the context of a securities enforcement action brought by a public enforcer without strong financial incentive to bring cases with questionable merit. 1 A. Federal Securities Litigation Reform is Directed at Private Class Actions, not Public Enforcement )'he ability of private parties to bring suit under the federal securities laws exists by the grace of Congress and the federal courts. The PSLRA and SLUSA are examples of the power of Congress to shape the right of private parties to bring federal securities claims. These statutes do not apply to public enforcers. The primary federal public enforcer, the Securities and Exchange Commission ("SEC"), has never been subject to the PSLRA and SLUSA despite the fact that it routinely brings suits recovering monetary relief based on harms to thousands of individual investors. 'Similarly, the fact that the Attorney General seeks to recover based on harms to investors does not subject it to these statutes. The right of private parties to pursue federal securities fraud claims has always been somewhat tenuous. Private class action plaintiffs typically bring suit under Section 1 O(b) of the Securities Exchange Act of 1934 ("Section 1 O(b )") as well as SEC Rule 1 Ob-5 ("Rule 10b-5"). Neither Section 1 O(b) nor Rule 10b-5 explicitly provide for a private right of action. The federal 1 In addition, the Defendants' argument that the National Securities Markets Improvement Act of 1996 (HNSMIA") preempts this action is meritless. NSMIA is a statute that pre'empts state registration of certain securities before they are offered to investors. Requiring state registration when federal registration is already required can be burdensome as well as duplicative. As implicitly recognized by NSMIA's savings clause, state anti-fraud statutes are not as burdensome as registration requirements. In fact, the investment banking industry lobbied for the Martin Act as a less invasive form of regulation than a registration requirement that would affect all New York companies. As Michael E. Parrish explains: The [Investment Bankers Association] devoted large resources to the task of keeping New York State, the major securities market, free from registration or license laws. The New York legislature, with IBA encouragement, enacted a fraud measure in 1921 known as the Martin Act. ... Thereafter, the association hailed New York's statute as a monument to regulatory intelligence .... Michael E. Parrish, Securities Regulation and the New Deal 21-22 (1970). 2 courts created such a right through a series of decisions beginning in 1946, see Kardon v. National Gypsum Co., 69 F. Supp. 512,514 (E.D. Pa. 1946) and the U.S. Supreme Court explicitly recognized the right in the 1971 case Superintendent of Ins. ofN Y v. Bankers Life & Casualty Co., 404 U.S. 6 (1971). What the federal courts have created, they can take away. For example, in Central Bank of Denver v. First Interstate Bank of Denver, the U.S. Supreme Court held that private parties cannot assert claims against aiders and abettors of securities fraud under Section 1 O(b) and Rule 10b-5. 511 U.S. 164, 191 (1994). In doing so it cited the policy argument that private securities litigation imposes burdensome costs on corporations. Id. at 189-90. Because the private right of action had been created by the federal courts, the U.S. Supreme Court has the prerogative to limit a judicially implied cause of action on policy grounds. Motivated by similar concerns as those cited in Central Bank of Denver, the PSLRA reflects Congress's power to limit the scope of private remedies under Section 1 O(b) and Rule 10b-5. Reacting to the perception that private securities litigation was imposing excessive costs on corporations, the PSLRA prescribed various procedural and other limitations on such litigation. But at the same time, Congress preserved and even expanded the right of the federal public enforcer of the securities laws, the SEC, to bring cases under Section 1 O(b). For example, private securities litigation under Section 10(b) and Rule lOb-5, but not SEC enforcement actions, are subject to heightened pleading requirements. Furthermore, Section 104 of the PSLRA made it clear that the SEC has authority to prosecute those who aid and abet securities fraud, essentially limiting the reach of Central Bank of Denver to private class actions. 15 U.S.C. § 78t. In confirming this government enforcement authority, Congress distinguished 3 between private parties, who abused the right to bring suit under the federal securities laws, and public enforcers, who had not. Congress drew this distinction despite the fact that the SEC has the power to distribute funds to investors through traditional disgorgement funds and Section 308 of the Sarbanes-Oxley Act of2002, the so-called Fair Funds provision. See 15 U.S.C. § 7246. The SEC has recovered billions of dollars, much of it passed on to private parties, under the federal securities laws without being subject to the PSLRA's limits. See} e.g., Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 166 (2008) ("SEC enforcement actions have collected over $10 billion in disgorgement and penalties, much of it for distribution to injured investors."). The Attorney General likewise recovers monetary relief in enforcement actions and distributes funds to investors. Indeed, in this very case, funds recovered in the settlement with AIG have gone to compensate those harmed, and the Attorney General seeks to recover damages from the Defendants that also likely will be distributed to harmed investors. To deem such an action impliedly preempted by the PSLRA would ignore the decision by Congress to preserve public securities enforcement, including public enforcement that ultimately compensates investors, at the same time that it took steps to restrict private litigation. SLUSA is similar to the PSLRA in that it distinguishes between private and public enforcers. SLUSA only applies to certain class actions brought by a "private party." 15 U.S.C. § 78bb(f)(I). In contrast, SLUSA explicitly exempts enforcement actions brought by a "securities commission (or any agency or office performing like functions) of any State .... " 15 U.S.C. § 78bb(f)( 4). SLUSA exempts public enforcers such as the Attorney General from preclusion, just as the PSLRA distinguishes between private enforcers and the SEC. 4 B. The Attorney General Does Not Have the Same Incentives as a Private Class Action Attorney The PSLRA and SLUSA do not restrict public enforcers because they do not have monetary incentive to bring securities actions with questionable merit. Public and private attorneys have different incentives in enforcing the securities laws. Private class action attorneys are primarily driven by the prospect of personal profits in bringing class actions on behalf of investors. Private class action attorneys typically receive about 20% of any recovery in a securities class action. They thus have financial incentive to bring any securities fraud claim that will likely settle, regardless of the underlying merit of the claim. Securities class actions are particularly attractive for private class action attorneys because of the significant market value of public company stock, which can translate into large monetary losses in the wake of a fraud. The PSLRA and SLUSA were targeted at the abuses that came about from private class action attorneys who brought an excessive number of securities class actions without merit for profit. In contrast, attorneys working for public enforcers do not have personal monetary incentive to enforce the securities laws. The funding of public enforcers comes from public tax dollars. Government attorneys receive no portion of any recovery, and must be motivated by non-monetary considerations in bringing a case. Admittedly, public enforcers may bring cases for their own selfish motives. The prestige of a public enforcer will increase when it successfully uncovers securities fraud. Attorneys working for public enforcers may advance their careers by bringing suits against high profile defendants. However, these potential problems were not the subject of the PSLRA and SLUSA. The PSLRA and SLUSA were directed at the significant number of private securities class actions filed each year. State attorneys general do not bring nearly as many securities 5 I I r r t r. I enforcement cases against nationally traded companies as private class action attorneys. A recent study by Professor Amanda Rose finds that from 2004 to 2006, state attorneys general nationwide brought enforcement cases against a total of 42 nationally traded issuers, less than 15 cases a year. See Amanda M. Rose, State Enforcement of National Policy: A Contextual Approach (With Evidence From the Securities Realm), at *40-*41 (forthcoming Minnesota Law Review), available at http://papers.ssrn.com/so13/papers.cfm?abstract_id=2127742. In contrast, my research found that between 1996 and 2004, an average of more than 150 issuers each year were subject to private securities class actions alleging damages resulting from a stock price inflated by fraud. See James J. Park, Securities Class Actions and Bankrupt Companies, III Mich. L. Rev. 547, 560-61 (2013). The incentives of public enforcers such as the Attorney General differ significantly from the incentives of private class action attorneys. As a result, the PSLRA and SLUSA specifically exempt public enforcers from their ambit. II. The Attorney General Plays an Important Role in Deterring Securities Fraud Defendants' position is that the New York Attorney General should not be permitted to enforce the Martin Act to recover damages based on investor losses. Apart from the fact that this position is completely unsupported by the law, it would have adverse policy implications because the Attorney General plays an important role in deterring and punishing securities fraud. As early as 1966, Professor Henry Manne wrote: "The attorney general of New York, operating under the simplest and shortest securities laws in the country, regularly vies with the SEC, operating under the most complex and detailed system, for the prosecution of fraudulent stock manipulators." Henry Manne, Insider Trading and the Stock Market 146 (1966). More recently, Professor Jill Fisch has noted that "state regulators have often played an important role in the 6 protection of retail investors--a role traditionally within the core competency of the SEC, but that has received diminished SEC attention in recent years." Jill E. Fisch, Top Cop or Regulatory Flop? The SEC at 75, 95 VA. L. REv. 785, 798 (2009). The Attorney General and other state enforcers throughout the nation help ensure adequate enforcement of the securities laws. A. The Limits of the SEC Despite its tradition of excellence, the SEC is limited in its ability to detect and pursue securities fraud. The SEC faces limited resources, a bureaucracy that can be slow to move, and at times may be unduly influenced by the securities industry. Additional enforcers such as the Attorney General are needed because of the SEC's limitations. 1. The SEC has limited resources The SEC at times has not had enough funding for its many important responsibilities. See, e.g., James B. Stewart, As a Watchdog Starves, Wall Street is Tossed a Bone, N.Y. Times July 16,2011, at Al (noting that SEC enforcement division has been underfunded). The SEC is responsible not just for securities enforcement, but also for regulation of the capital markets, broker-dealers, and investment advisers. Only so much can be devoted to securities enforcement, which in itself is a substantial task. Securities fraud comes in many shapes and sizes, and uncovering the fraud and developing a case is a demanding and time intensive process. No one enforcer can hope to catch all securities fraud, and even in the best of times, the SEC's enforcement budget does not allow for comprehensive securities fraud enforcement. 2. The SEC's bureaucracy hinders effective enforcement The SEC's bureaucracy can make its enforcement process slow and ineffective. Because of the wide scope of its responsibilities and need to make consistent policy, cases and 7 I investigations must go through a lengthy review process. This bureaucracy has at times resulted I. in the perception that the SEC is ineffective in enforcing the securities laws. See, e.g., Mark I I 1 .~ Maremont & Deborah Solomon, Missed Chances: Behind SEC's Failings: Caution, Tight Budget, (90s Exuberance, Wall St. J., Dec. 24,2003, at Al (describing SEC as "timid, poorly managed bureaucracy"). I. The impact of the SEC's bureaucracy on its ability to enforce the securities laws was the I I t I subject of a recent study by the U.S. Government Accountability Office. See U.S. Government Accountability Office, Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement ("GAO Report") (March 2009), available at 1 http://www.gao.gov/assets/290/288I56.pdf. The report noted that the SEC's own "[ e ]nforcement staff said a burdensome system for internal case review has slowed cases and created a risk-averse culture.n Id. at preface. Some enforcement attorneys reported they spent "a third to 40 percent of their time on the internal review process, thus making it harder to meet the division's emphasis on bringing cases on a timely basis." Id. at 28. Excessive delay reduces the initiative of the staff and the effectiveness of SEC enforcement. Id. at 20-21. Though efforts have been made to reduce the SEC's bureaucracy, there is no assurance that the SEC's process for bringing enforcement processes will be effective. 3. The SEC may be captured by the securities industry The SEC has been criticized at times for its susceptibility to industry influence. This tendency is consistent with the academic hypothesis that government regulators can be captured by the industry that they regulate. Regulators may take on the perspective of the industry because they are in close contact with the industry and subject to its influence. As a result, the SEC may perceive it is in its best interest to cater to the interests of the industry. For example, 8 two commentators noted that "[i]fyou work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed of it." Michael Lewis & David Einhorn, The End o/the Financial World as We Know It, N.Y. TIMES, Jan. 4, 2009, at 9. To the extent that the SEC suffers from capture, it may not enforce the securities laws effectively. B. Enforcement by the Attorney General is an Important Supplement to SEC Enforcement The Attorney General's enforcement resources, including its power under the Martin Act to recover restitution and damages that would compensate investors who suffer losses from securities fraud, provide an important supplement to SEC enforcement. In particular, the Attorney General can sometimes take action when the SEC is not willing or able to do so. The Attorney General is less likely than the SEC to be subject to the constraints of bureaucracy and capture, for at least two reasons. First, because it does not have the burdens of regulating all aspects of the securities markets, the Attorney General has greater flexibility in deploying its resources. And second, the Attorney General is not as closely tied to the securities industry and is thus less subject to its influence. As Professor Jonathan Macey has noted with respect to the Attorney General who initially brought this case: "the intensity of Spitzer's efforts can in some measure be attributed to the fact that the New York Attorney General's Office enjoys more distance from, and is therefore less susceptible to capture by, the very entities it is charged with regulating." Jonathan R. Macey, State-Federal Relations Post-Eliot Spitzer, 70 Brook. L. Rev. 117, 121 (2004). The Attorney General's efforts have not only benefited the people of New York, but they also have spurred the SEC to reform its enforcement efforts. As Professors John Coffee and 9 1- Hillary Sale have observed: "state Attorneys General have played an aggressive role in prosecuting securities fraud and have pushed the SEC to be more vigorous in its own enforcement efforts." John C. Coffee, Jr. & Hillary A. Sale, Redesigning the SEC: Does the Treasury Have a Better Idea?, 95 Va. L. Rev. 707, 763 (2009). C. Defendants' Argument Would Eliminate the Ability of the New York Attorney General to Respond to Inaction by the SEC Adopting Defendants' position would mean that the New York Attorney General could not recover damages based on the harm caused to investors damaged by securities fraud when pursuing a securities enforcement case. Without the ability to recover damages, the Attorney General's ability to deter securities fraud would be severely compromised. The Attorney General cannot adequately supplement the SEC without powers similar to those of the SEC, which as noted earlier routinely distributes monetary recoveries to investors. The experience of the SEC has been that the ability to sanction public companies and executives that commit securities fraud is essential to deterrence. Prior to the mid-1980s, the SEC did not have the general power to impose monetary penalties on violators of the securities laws. As a result, SEC enforcement was seen as toothless because it would result in no punishment other than a promise not to violate the law again. See, e.g., Harvey L. Pitt & Karen L. Shapiro, Securities Regulation By Enforcement: A Look Ahead At the Next Decade, 7 Yale 1. Reg. 149,224 (1990) (noting that prior to being granted the power to impose penalties for insider trading in 1984, "the law provided little, if any, deterrence to an insider trader - at most, after a lengthy delay during which the [SEC] first had to detect and investigate a suspicious transaction, the defendant would merely be ordered to disgorge his ill-gotten gains, as ancillary relief to a civil injunction."). The ability of the SEC to sanction violators and obtain monetary relief based on harms to investors has been critical to its ability to deter securities fraud. Similarly, if the 10 Attorney General is to continue functioning as an important supplement to the SEC, the Attorney General needs the power to recover damages and other monetary relief. CONCLUSION The Defendants' argument for preemption is without merit because the PSLRA and SLUSA only apply to private parties, not public enforcers. Preempting the Attorney General's power to recover on behalf of investors would hinder the Attorney General's efforts to supplement SEC enforcement and adequately address the problem of securities fraud. Dated: Brooklyn, NY January 25, 2013 11 James 1. Park Associate Professor of Law Brooklyn Law School 250 J oralemon Street, Room 901 Brooklyn, NY (718)780-7569