The People of the State of New York by Andrew M. Cuomo,, Respondent,v.Maurice R. Greenberg, et al., Appellants.BriefN.Y.May 28, 2013 New York County Clerk’s Index No. 401720/05 Court of Appeals of the State of New York THE PEOPLE OF THE STATE OF NEW YORK by ANDREW M. CUOMO, Attorney General of the State of New York, Plaintiff-Respondent, – against – MAURICE R. GREENBERG and HOWARD I. SMITH, Defendants-Appellants. BRIEF OF AMICI CURIAE FORMER STATE AND FEDERAL GOVERNMENT OFFICIALS IN SUPPORT OF DEFENDANTS-APPELLANTS (See Addendum for Complete List of Amici Curiae) WALTER DELLINGER DEANNA RICE O’MELVENY & MYERS LLP 1625 Eye Street, NW Washington, DC 20006 Tel.: (202) 383-5300 Fax: (202) 383-5414 ANDREW J. FRACKMAN ANTON METLITSKY O’MELVENY & MYERS LLP Times Square Tower Seven Times Square New York, New York 10036 Tel.: (212) 326-2000 Fax: (212) 326-2061 Attorneys for Amici Curiae Former State and Federal Government Officials Date Completed: January 31, 2013 TABLE OF CONTENTS Page -i- STATEMENT OF AMICUS INTEREST ................................................................ 1 INTRODUCTION AND SUMMARY OF ARGUMENT ...................................... 1 ARGUMENT ............................................................................................................ 5 I. THERE IS AN OVERWHELMING NATIONAL INTEREST IN REGULATING SECURITIES MARKETS, AND CONGRESS HAS VINDICATED THAT INTEREST BY MANDATING ONE, UNIFORM FEDERAL STANDARD FOR MOST SECURITIES REGULATION ............................................................................................... 5 II. THE MODERN MARTIN ACT AND THIS ACTION .............................. 12 III. THE ATTORNEY GENERAL’S MARTIN ACT ACTION FOR DAMAGES ON BEHALF OF A NATIONWIDE GROUP OF FORMER AIG SHAREHOLDERS IS PREEMPTED ................................ 19 A. The Plain Text Of SLUSA Requires Preemption .............................. 20 B. Preemption Is Also Required By The Purpose Of The Federal Securities Laws To Create A Uniform System Of Federal Regulations ......................................................................................... 24 IV. FEDERALISM SUPPORTS ONE, UNIFORM FEDERAL STANDARD IN THE CIRCUMSTANCES OF THIS CASE .................... 27 CONCLUSION ....................................................................................................... 33 TABLE OF AUTHORITIES Page -ii- CASES Aaron v. SEC, 446 U.S. 680 (1980) ............................................................................................ 24 Alden v. Maine, 527 U.S. 706 (1999) ...................................................................................... 27, 28 Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592 (1982) .....................................................................................passim Baltimore & Ohio R.R. v. Baugh, 149 U.S. 368 (1893) ............................................................................................ 27 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) .............................................................................................. 6 Bluebird Partners, L.P. v. First Fidelity Bank, 896 F. Supp. 152 (S.D.N.Y. 1995) ..................................................................... 29 Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) .............................................................................................. 6 CPC Int’l Inc. v. McKesson Corp., 70 N.Y.2d 268 (1987) ......................................................................................... 12 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) .................................................................................. 7, 18, 22 In re Am. Int’l Group, Inc. Secs. Litig., No. 1:04-cv-08141 (S.D.N.Y.) ........................................................................... 17 Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. P’ship, 12 N.Y.3d 236 (2009) ......................................................................................... 12 Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101 (2d Cir. 2001) ........................................................................passim McCulloch v. Maryland, 17 U.S. 316 (1819) .............................................................................................. 28 Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) .......................................................................................passim N. Am. Co. v. SEC, 327 U.S. 686 (1946) ............................................................................................ 28 TABLE OF AUTHORITIES (continued) Page -iii- N. Sec. Co. v. United States, 193 U.S. 197 (1904) ............................................................................................ 28 Nat’l Fed’n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566 (2012) ........................................................................................ 27 New York ex rel. Abrams v. Seneci, 817 F.2d 1015 (2d Cir. 1987) ....................................................................... 23, 24 New York ex rel. Vacco v. Operation Rescue Nat’l, 80 F.3d 64 (2d Cir 1996) .................................................................................... 23 People ex rel. Cuomo v. Coventry First LLC, 52 A.D.3d 345 (2008) ......................................................................................... 30 People ex rel. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105 (2008) ......................................................................................... 16 People v. Federated Radio Corp., 244 N.Y. 33 (1926) ....................................................................................... 13, 19 State v. Justin, 779 N.Y.S.2d 717 (2003) .................................................................................... 31 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148 (2008) ............................................................................................ 24 U.S. Term Limits v. Thornton, 514 U.S. 779 (1995) ............................................................................................ 27 STATUTES N.Y. Gen. Bus. Law § 352 ....................................................................................... 12 N.Y. Gen. Bus. Law § 352-c .................................................................................... 14 N.Y. Gen. Bus. Law § 353 ....................................................................................... 14 N.Y. Gen. Bus. Law § 354 ....................................................................................... 13 N.Y. Gen. Bus. Law § 358 ....................................................................................... 14 National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416 .................................................................... 8 Private Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737 (1995) ............................................................ 7 TABLE OF AUTHORITIES (continued) Page -iv- Securities Act of 1933, Pub. L. No. 73-22, 48 Stat. 74 .............................................................................. 6 Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 881 ................................................................ 6, 7, 18 Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, 112 Stat. 3227 .................................................................... 9 15 U.S.C. § 77p .................................................................................................. 11, 18 15 U.S.C. § 77r ......................................................................................................... 11 15 U.S.C. § 78u-4 ................................................................................................. 7, 18 15 U.S.C. § 78bb ..............................................................................10, 11, 18, 20, 23 REGULATIONS 17 C.F.R. § 240.10b-5 ............................................................................................ 6, 7 LEGISLATIVE HISTORY H.R. Conf. Rep. No. 104-369 (1995) ............................................................... 7, 8, 18 H.R. Rep. No. 104-622 (1996) ............................................................................. 8, 11 H.R. Rep. No. 104-864 (1996) ............................................................................. 9, 28 H.R. Rep. No. 105-640 (1998) ................................................................................... 9 H.R. Rep. No. 105-803 (1998) ................................................................................. 10 S. Rep. No. 105-182 (1998) ......................................................................... 11, 25, 27 OTHER AUTHORITIES The Federalist No. 7 (Alexander Hamilton) ............................................................ 31 Barry Kamins, The Martin Act: A Sleeping Giant, N.Y.L.J., Dec. 13, 2007 .............................................................................. 5, 6, 15 Christopher R. Lane, The March Toward Preemption: Resolving Conflicts Between State and Federal Securities Regulators, 39 New Eng. L. Rev. 317 (2005) ....................................................................... 29 TABLE OF AUTHORITIES (continued) Page -v- Jonathan R. Macey, The SEC at 70: Positive Political Theory And Federal Usurpation Of The Regulation Of Corporate Governance: The Coming Preemption Of The Martin Act, 80 Notre Dame L. Rev. 951, 961 (2005) ...................................................... 13, 15 Press Release, New York Attorney General, Federated Settles Mutual Fund Timing Investigation (Nov. 28, 2005) ................................................................ 30 Press Release, New York Attorney General, H&R Block Sued for Fraudulent Marketing of IRAs (Mar. 15, 2006) ................................................. 30 Michael G. Oxley, Who Should Police the Financial Markets?, N.Y. Times, June 9, 2002, ................................................................................. 29 Martin H. Redish & Shane V. Nugent, The Dormant Commerce Clause and the Constitutional Balance of Federalism, 1987 Duke L.J. 569 ............................................................................................. 31 Louise Schiavone, Spitzer Poised to Probe Grasso Pay: The SEC and the New York Attorney General Will Look into Grasso’s $190 Million Compensation, CNN, Jan. 8, 2004 ............................................................................................... 29 Nicholas Thompson, The Sword of Spitzer, Legal Affairs, May/June 2004 ............................................................................ 12 Aaron M. Tidman, Note, Securities Law Enforcement In The Twenty-First Century: Why States Are Better Equipped Than The Securities And Exchange Commission To Enforce Securities Law, 57 Syracuse L. Rev. 379 (2007) ................................................................... 15, 29 Joseph B. Treaster, Marsh Announces 3,000 Layoffs And Other Cuts As Profit Plunges, N.Y. Times, Nov. 10, 2004 ................................................................................. 30 -1- STATEMENT OF AMICUS INTEREST Amici are former state and federal government officials, including governors, U.S. Congressmen, Commissioners of the Securities and Exchange Commission, and state and federal Attorneys General.1 As such, amici have an intimate knowledge of, and an ongoing interest in, the proper regulation of the securities markets and, more generally, the proper allocation of authority between the state and federal governments. In particular, amici have experience with both the benefits of robust state regulatory authority to protect state interests and the problems inherent in leaving national markets to be regulated by more than 50 different sovereigns. For the reasons explained below, amici believe that Congress has made the judgment that actions, like this one, for private damages on behalf of a large group of shareholders purportedly injured by securities fraud may proceed, if at all, only under federal law and in federal court. Moreover, Congress’s judgment is correct under a proper conception of federalism. INTRODUCTION AND SUMMARY OF ARGUMENT In this case, the Attorney General of New York purports to use the Martin Act—New York’s securities fraud statute—to bring what amounts to a private securities fraud class action, seeking to hold the defendants liable for money damages suffered by holders of AIG stock. All agree that, if this were an ordinary, 1 A list of amici is attached as an addendum to this brief. -2- private class action, it would be preempted by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), which precludes (among other things) all state- law securities fraud actions brought on behalf of over 50 people. Indeed, this action parallels an actual securities fraud class action currently pending in federal court in the Southern District of New York, which is subject to SLUSA’s strictures. This case should be treated no differently. This lawsuit does not protect or enforce any plausible sovereign interest of the State; indeed, it is nothing more than a private class action seeking recovery of private damages, with the State as a nominal party. The Attorney General’s use of the Martin Act in this case flies in the face of the uniform, national regulatory scheme established by Congress, and of federalism principles more generally. It would be one thing if the Attorney General were using the Martin Act in this case to enforce or protect some sovereign interest of the State—a type of action Congress has expressly saved from preemption. But the Attorney General is doing no such thing. Here, the only damages sought by the Attorney General are private damages on behalf of private individuals for private injuries.2 The U.S. 2 In his response brief, the Attorney General emphasizes that the “complaint in this action seeks many forms of relief in addition to damages, including injunctive relief, disgorgement, attorney’s fees, and costs.” Resp. Br. at 56. But the Attorney General has previously abandoned pursuit of those other remedies, arguing below that he sought only damages on behalf of private individuals, R. 14870 (“Simply put, the Attorney General brings these cases to recover damages suffered by many, sometimes tens of thousands or more, investors.”), and -3- Supreme Court and other courts have consistently explained that a state action to collect private damages does not count as an enforcement action to protect a sovereign interest, but is instead in substance a private action, with the State as merely a “nominal party.” This action, therefore, does not meaningfully differ from the private state- law class actions preempted by SLUSA. Indeed, allowing this private action to go forward would conflict with the express purposes of that statute. Rather than accepting the uniform national market for national securities regulation established by Congress and federal regulatory agencies, the Attorney General undertakes to implement his own regime of private securities fraud class actions, featuring extensive investigatory authority, lax substantive standards (including the lack of any scienter requirement), and nationwide jurisdictional reach. The Attorney General’s preferred regime is not only specifically preempted by congressional enactments, but is also contrary to any plausible conception of federalism. Even if the Attorney General has authority to bring this type of action acknowledging that settlement of the parallel federal class action in this matter would preclude further litigation of his claims, Objection of the Attorney General to the Proposed Starr Settlement, In re Am. Int’l Grp., Inc. Secs. Litig., No.1:04-cv- 08141, ECF No. 650, at 3 (Aug. 17, 2012) (“[T]he broad terms of the releases would terminate NYAG’s assiduous, seven-year pursuit of compensation for the injured AIG shareholders.” (citation omitted)). Thus, despite the Attorney General’s belated attempt to resurrect his claims for other forms of relief, by his own prior admissions, the award of private damages is now the sole aim of this action. -4- under the Martin Act, his aggressive use of the that Act over the past decade has not been limited to New York corporations—indeed, the Attorney General has made a point of flexing his regulatory muscle against corporations and individuals throughout the Nation. Thus, instead of the National Government regulating the Nation and state governments regulating the States, the Attorney General has attempted to assert himself (and, thus, the State of New York) as a principal, nationwide regulator of the securities market, imposing significant costs on employers and employees far beyond New York’s borders. It may be open to reasonable dispute whether the externalities imposed by the Attorney General’s use of the Martin Act are justified even when that use serves to protect or enforce a legitimate sovereign interest of New York. It is an accepted consequence of the federalist system that the States are sovereign within their own domain, and it is inevitable that their enforcement of that sovereign authority may at times have an effect on other States. Weighing the costs and benefits of such a regime, however, is up to Congress and, at least with respect to the national securities markets, Congress has expressly carved out from preemption state authority to bring enforcement actions for securities fraud. It is entirely another matter for the Attorney General to attempt to serve as a de facto nationwide regulator when he has, until now, not even purported to vindicate any sovereign interest of the State—only the private interests of private -5- shareholders. In that specific circumstance, the State has no basis whatever to impose its own regulatory regime—and the extensive costs of that regime—on its sister States, and on the Nation. There is already a private class action, subject to uniform national standards, pending in federal court and alleging precisely the same fraud as is at issue here, and that class is represented by three Ohio state funds whose counsel is the Ohio Attorney General. There is no reason to allow the Attorney General to continue to prosecute a second one. This action is preempted and should be dismissed. ARGUMENT I. THERE IS AN OVERWHELMING NATIONAL INTEREST IN REGULATING SECURITIES MARKETS, AND CONGRESS HAS VINDICATED THAT INTEREST BY MANDATING ONE, UNIFORM FEDERAL STANDARD FOR MOST SECURITIES REGULATION 1. “In the beginning of the 20th century there was virtually no protection offered by state governments against fraudulent securities schemes.” Barry Kamins, The Martin Act: A Sleeping Giant, N.Y.L.J., Dec. 13, 2007, at 3. In 1911, “Kansas became the first state to enact a ‘blue sky’ law that attempted to protect investors from swindlers who, as the term was derived, would sell shares of the blue sky to unsuspecting purchasers.” Id. New York was one of the last States to adopt its own “blue sky” law. The Martin Act—named after its sponsor, Assemblyman Louis M. Martin—was enacted in 1921. In its original form, the -6- Martin Act “was viewed as a weak law; while it gave the attorney general the authority to investigate securities fraud, its only weapon to accomplish this was the attorney general’s ability to enjoin fraudulent practices and schemes.” Id. 2. State securities regulation, on its own, proved ineffective. Id. Cognizant that it was impossible to overstate “[t]he magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities,” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 78 (2006), Congress stepped in. The Securities Act of 1933, Pub. L. No. 73-22, 48 Stat. 74, and the Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 881—along with the rules promulgated by the Securities and Exchange Commission (“SEC”) to further their aims—represent the bedrocks of the system of federal securities regulation. See Dabit, 547 U.S. at 78. The 1933 Act regulates the “initial distributions of securities,” Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 171 (1994), mandating and delegating to the SEC authority over “the required contents of registration statements and prospectuses, and expressly provid[ing] for private civil causes of action.” Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 728 (1975). The 1934 Act, meanwhile, is principally concerned with “post-distribution trading.” Cent. Bank of Denver, 511 U.S. at 171. Section 10(b) of the 1934 Act, along with SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, “broadly prohibits deception, -7- misrepresentation, and fraud ‘in connection with the purchase or sale of any security.’” Dabit, 547 U.S. at 78. 3. Over time, Congress has identified inadequacies in the federal securities- regulation scheme and adopted additional legislation amending the core securities laws to cure these defects. In 1995, for example, Congress passed the Private Securities Litigation Reform Act (“PSLRA”), Pub. L. No. 104-67, 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u-4), in response to “perceived abuses of the class-action vehicle in litigation involving nationally traded securities.” Dabit, 547 U.S. at 81. The consequences of such abuses were far-reaching: The House Conference Report “identified ways in which the class-action device was being used to injure ‘the entire U.S. economy.’” Dabit, 547 U.S. at 81 (quoting H.R. Conf. Rep. No. 104-369, at 31 (1995)). To counteract these and other negative effects, provisions of the PSLRA, among other things, “limit recoverable damages and attorney’s fees, provide a ‘safe harbor’ for forward-looking statements, impose new restrictions on the selection of (and compensation awarded to) lead plaintiffs, mandate imposition of sanctions for frivolous litigation, and authorize a stay of discovery pending resolution of any motion to dismiss.” Id. (citing 15 U.S.C. § 78u-4). The PSLRA also imposes heightened pleading requirements for claims brought under §10(b) of the 1934 Act and SEC Rule 10b-5. See 15 U.S.C. § 78u-4(b)(1); Dura Pharm., -8- Inc. v. Broudo, 544 U.S. 336, 345 (2005). Placing these reforms in context, the House Conference Report on the PSLRA emphasized that “[t]he overriding purpose of our Nation’s securities laws is to protect investors and to maintain confidence in the securities markets, so that our national savings, capital formation and investment may grow for the benefit of all Americans.” H.R. Conf. Rep. No. 104-369, at 31. The PSLRA, however, did not cover all of the adjustments that Congress believed were necessary to more effectively regulate the securities markets. To further “modernize and rationalize” the regulatory scheme, “including the respective responsibilities of Federal and State governmental authorities over the securities markets,” Congress passed the National Securities Markets Improvement Act of 1996 (“NSMIA”), Pub. L. No. 104-290, 110 Stat. 3416. H.R. Rep. No. 104- 622, at 16 (1996). Specifically, the NSMIA primarily functions to preempt state “Blue Sky” laws—like the Martin Act, see supra at 5—that require issuers to register securities with state authorities prior to marketing in the State, a practice that was redundant and inefficient. Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 108 (2d Cir. 2001). The NSMIA was focused on streamlining the regulatory process, as legislators acknowledged that “[s]ecurities offerings and the brokers and dealers engaged in securities transactions are all currently subject to a dual system of regulation that, in many instances, is redundant, costly, and -9- ineffective.” H.R. Rep. No. 104-864, at 39 (1996). The Act “allocated regulatory responsibility between the Federal and state governments based on the nature of the securities offering.” Id. at 40. Under this scheme, “[s]ome securities offerings, such as those made by investment companies, and certain private placements are inherently national in nature, and are therefore subject to only Federal regulation,” while “[s]maller, regional, and intrastate securities offerings remain subject to state regulation.” Id. Meanwhile, the PSLRA had largely achieved its goal of making it more difficult to file vexatious securities class actions in federal court. Plaintiffs, however, reacted to the change in federal standards by bringing increasing numbers of securities class actions under state law to avoid the PSLRA’s strictures. Dabit, 547 U.S. at 82. “To stem this ‘shif[t] from Federal to State courts’ and ‘prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of’ the Reform Act,” Congress passed the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). Id. (alteration in original) (quoting SLUSA § 2(2), (5)). SLUSA “establishe[d] uniform national rules for securities class action litigation involving our national capital markets” and aimed to make “Federal court the exclusive venue for most securities class action lawsuits.” H.R. Rep. No. 105-640, at 8, 9 (1998). -10- SLUSA was also intended to complement the NSMIA. Lander, 251 F.3d at 108. SLUSA reaffirmed Congress’s commitment to creating national uniformity in the standards governing securities litigation that impacts “our national capital markets,” which had also motivated passage of the NSMIA. See H.R. Rep. No. 105-803, at 13 (1998). One way in which SLUSA achieved its stated goals was by precluding certain securities class actions based on state law. SLUSA’s “core provision” states: CLASS ACTION LIMITATIONS.—No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging— (A) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. 112 Stat. 3228 (1933 Act amendment) (codified at 15 U.S.C. § 77p(b)); see also 15 U.S.C. § 78bb(f) (same amendment to 1934 Act, except substituting “a misrepresentation” for “an untrue statement”)). A “covered class action” is a lawsuit in which damages are sought on behalf of more than 50 people. 112 Stat. 3229 (codified at 15 U.S.C. § 77p(f)(2)) (1933 Act amendment); id. § 78bb(f)(5)(B)(i)(I) (1934 Act)). A “covered security” is one traded nationally and listed on a regulated national exchange. 112 Stat. 3230 (codified at 15 U.S.C. § 77p(f)(3) (1933 Act amendment); id. § 78bb(f)(5)(E) (1934 Act)). -11- Both SLUSA and the NSMIA ensured that States would have a limited role in the national securities regulatory regime. SLUSA authorizes a State to “retain jurisdiction under the laws of such State to investigate and bring enforcement actions.” 15 U.S.C. § 77p(e) (1933 Act); id § 78bb(f)(4) (1934 Act). Similarly, the NSMIA allows a State to “retain jurisdiction under the laws of such State to investigate and bring enforcement actions, in connection with securities or securities transactions … with respect to … fraud or deceit.” 15 U.S.C. § 77r(c)(1)(A)(i). But that is all: As Congress made clear, “[w]e do have national markets for certain securities,” and SLUSA (like the NSMIA before it) was passed, in significant part, to help ensure that no single State or jurisdiction could “impose the risks and costs of its peculiar litigation system on all national issuers” to the detriment of the national economy. S. Rep. No. 105-182, at 5, 15 (1998). Thus, taking the federal securities laws together, it is evident that “Congress intended to provide national, uniform standards” for litigation concerning “nationally marketed securities.” Lander, 251 F.3d at 111. These statutes “promote efficiency, competition, and capital formation in the capital markets,” and “advance the development of national securities markets … by, as a general rule, designating the Federal government as the exclusive regulator.” H.R. Rep. No. 104-622, at 16. As explained below, the Attorney General’s use of the Martin Act in this action flies in the face of these federal statutes, and of federalism itself. -12- II. THE MODERN MARTIN ACT AND THIS ACTION 1. This action was brought under the Martin Act, N.Y. Gen. Bus. Law, Art. 23–A, §§ 352–359. As a general matter, “[t]he Martin Act authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State.” Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. P’ship, 12 N.Y.3d 236, 243 (2009); see N.Y. Gen. Bus. Law § 352. The Act’s purpose “was to create a statutory mechanism in which the Attorney-General would have broad regulatory and remedial powers to prevent fraudulent securities practices by investigating and intervening at the first indication of possible securities fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution.” CPC Int’l Inc. v. McKesson Corp., 70 N.Y.2d 268, 277 (1987). While the Martin Act’s purpose is unexceptionable, the scope of its grant of enforcement authority is anything but. Indeed, “[c]ombined, the act’s powers exceed those given any regulator in any other state.” Nicholas Thompson, The Sword of Spitzer, Legal Affairs, May/June 2004.3 To begin, unlike most fraud statutes, the Act contains no scienter requirement. Indeed, the Act is not even limited to fraud in the ordinary meaning of that term: This Court has long held that the Act’s prohibition against “fraud” should “be given a wide meaning, so as to 3 Available at http://www.legalaffairs.org/issues/May-June- 2004/feature_thompson_mayjun04.msp. -13- include all acts, although not originating in any actual evil design or contrivance to perpetrate fraud or injury upon others, which do by their tendency to deceive or mislead the purchasing public come within the purpose of the law.” People v. Federated Radio Corp., 244 N.Y. 33, 38-39 (1926) (emphasis added). “In other words, the term ‘fraud’ in the Martin Act goes far beyond what the common law defined as fraud.” Jonathan R. Macey, The SEC at 70: Positive Political Theory And Federal Usurpation Of The Regulation Of Corporate Governance: The Coming Preemption Of The Martin Act, 80 Notre Dame L. Rev. 951, 961 (2005). Thus the Act gives the Attorney General extensive authority to regulate any purportedly “fraudulent” practices, in the extremely broad sense described above. E.g., N.Y. Gen. Bus. Law § 354. Beyond its substantive breadth, the Act also delegates to the Attorney General wide-ranging investigatory powers. The Act grants the Attorney General exceptionally broad subpoena powers, allowing him to compel documents or testimony “upon his information and belief that the testimony of such person or persons is material and necessary.” N.Y. Gen. Bus. Law § 354. A court order is of course required to compel such testimony, but the Attorney General may proceed ex parte, and so long as the “material and necessary” standard is satisfied, “it shall be the duty of the justice of the supreme court to whom such application for the order is made to grant such application.” Id. Not only that, but a defendant’s -14- refusal to answer questions or to produce requested documents in the course of an investigation “shall be prima facie proof that such defendant is or has been engaged in fraudulent practices.” Id. § 353. The Act further establishes both civil and criminal liability, and empowers the Attorney General to seek a panoply of remedies. Id. §§ 353, 358. On the civil side, the Attorney General can not only enjoin ongoing “fraudulent” practices but also seek any relief that “the court may deem proper.” Id. § 353. In particular, “[u]pon a showing by the attorney general that a fraudulent practice as defined by this article has occurred, he may include in an action under this article an application to direct restitution of any moneys or property obtained directly or indirectly by any such fraudulent practice.” Id. Finally, the Act boasts a far-reaching geographic scope, requiring only that the purported fraud occur “within or from” New York. N.Y. Gen. Bus. Law § 352- c. That is, of course, an easy standard to satisfy in the securities fraud context, because most (if not all) public corporations’ securities are traded in New York. The Martin Act thus essentially gives the Attorney General nationwide jurisdiction to police securities fraud through enforcement actions. And when combined with the extensive investigative power, sweeping remedial authority, and lax substantive standards described above, the Martin Act’s de facto nationwide scope grants the Attorney General essentially plenary authority over the national market for -15- securities. Indeed, “[t]he Martin Act is unique among all state and federal securities laws because of the scope of its investigatory power, the breadth of its jurisdiction, and the combination of civil and criminal authority at the attorney general’s disposal.” Aaron M. Tidman, Note, Securities Law Enforcement In The Twenty-First Century: Why States Are Better Equipped Than The Securities And Exchange Commission To Enforce Securities Law, 57 Syracuse L. Rev. 379, 389 (2007). 2. As extraordinarily broad as the Martin Act is on its face, its sweep has been extended even further by the expansive interpretation of recent Attorneys General. Beginning with then-Attorney General Spitzer, the Attorney General’s office has aggressively employed the Martin Act as a blunt weapon to pursue perceived instances of securities fraud. See, e.g., Kamins, supra. Commentators have long noted that the increased number and aggressive nature of Martin Act actions has transformed this State’s Attorney General into a de facto national regulator, interfering with the prerogatives of national securities regulators such as the Securities and Exchange Commission. See, e.g., Macey, supra, at 956-72. But in this case, the Attorney General’s use of the Martin Act has been still more ambitious: by his own admission, the Attorney General is seeking compensatory damages on behalf of private shareholders for losses from alleged fraud. As the Attorney General has acknowledged, this suit seeks “to recover -16- damages suffered by many, sometimes tens of thousands or more, investors.” R.14870 (emphasis added). Nor, according to the Attorney General, is this action limited to New York shareholders: “the OAG can obtain damages on behalf of all AIG shareholders, no matter where they reside.” R.15173. In other words, this action is simply a private securities fraud damages action, no different than any other securities fraud class action, but without any procedural protections of a true class action. Indeed, the Attorney General has admitted as much, recognizing that the relief sought in this case so closely mirrors that sought in the parallel private class action that settlement of that action would have a preclusive effect here. And rightly so. People ex rel. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105 (2008), involved an action by the Attorney General to recover damages suffered by private individuals as a result of consumer fraud. A prior class action made up of the same private individuals that the Attorney General purported to represent had earlier settled, with a final judgment entered in favor of the class. This Court held that claim preclusion principles barred the Attorney General’s action because the relief the Attorney General sought (i.e., private damages) “is identical to that which the New York members of the Allec settlement class have already pursued to a final and binding judgment.” Id. at 124. As in Applied Card, there is a federal securities class action pending in the -17- Southern District of New York on behalf of precisely the same class that the Attorney General seeks to represent here, seeking precisely the same damages remedy. See In re Am. Int’l Group, Inc. Secs. Litig., No. 1:04-cv-08141 (S.D.N.Y.). A settlement has been reached in that action—in which the lead plaintiff consists of three Ohio state funds represented by the Ohio Attorney General—but the New York Attorney General has sought to prevent final approval of the settlement in large part based on his recognition that pursuant to “the New York Court of Appeals’ recent and controlling Applied Card decision, the broad terms of the releases would terminate NYAG’s … pursuit of compensation for the injured AIG shareholders.” Objection of the Attorney General of the State of New York to the Proposed Starr Settlement, In re Am. Int’l Group, Inc. Secs. Litig., No. 1:04-cv-08141, ECF No. 650, at 3 (Aug. 17, 2012) (citation omitted). In other words, the Attorney General has acknowledged that there is no functional or legal difference between the relief sought by a private federal securities fraud class of AIG shareholders and the relief he seeks under the Martin Act—both are seeking damages suffered by a group of private individuals as a result of alleged securities fraud. The parties in interest are the private shareholders on whose behalf damages are claimed—“the State is only a nominal party without a real interest of its own.” Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 600 (1982). -18- 3. While the relief sought by the Attorney General and that sought by the federal securities fraud class are the same, the actions are in every other way different. Under SLUSA, the class action can only be brought under federal law, and only in federal court. 15 U.S.C. §§ 77p(b), 78bb(f). And federal law imposes heightened substantive and procedural requirements on securities fraud class actions. As a general matter, federal class action rules allow unnamed class members who would otherwise be bound by the court’s judgment to opt out of the class. Moreover, the PSLRA’s provisions include new rules governing who may serve as a lead plaintiff and what compensation they are entitled to, limitations on attorney’s fees and damages, a “safe harbor for forward-looking statements” that aims to “encourage[e] companies to disclose forward-looking information,” measures to strengthen the application of Rule 11 sanctions for frivolous private securities actions, and authorization for courts to stay discovery pending a ruling on a motion to dismiss. H.R. Conf. Rep. No. 104-369, at 43 (1995); see Dabit, 547 U.S. at 81. Moreover, suits under § 10(b) of the 1934 Act require a showing of scienter, Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341 (2005), and the PSLRA heightened the pleading standards—including pleading of scienter—for § 10(b) claims. See 15 U.S.C. § 78u-4(b)(1), (2); Dura Pharm., 544 U.S. at 345. In contrast, this damages action under the Martin Act is burdened by none of those constraints. None of the intended beneficiaries of this Martin Act action may -19- opt out in favor of instituting an individual action for damages—and those intended beneficiaries could be bound by the judgment in this case under the principles of this Court’s Applied Card decision. Further, far from imposing any meaningful procedural safeguards, the Martin Act allows investigation on minimal suspicion and ex parte subpoenas requiring intrusive disclosure. In contrast to the heightened substantive standards required to plead and prove federal securities fraud, the Attorney General need not demonstrate scienter (or even fraud) to prevail in a Martin Act action. Instead, he need only establish an act that, “although not originating in any actual evil design or contrivance to perpetrate fraud or injury upon others, [does by its] tendency to deceive or mislead the purchasing public come within the purpose of the law.” Federated Radio Corp., 244 N.Y. at 38-39 (emphasis added). This state of affairs is precisely what Congress meant to avoid when enacting the federal securities laws—a regime of state-law-based private damages mass actions not subject to the uniform standards established by federal law. III. THE ATTORNEY GENERAL’S MARTIN ACT ACTION FOR DAMAGES ON BEHALF OF A NATIONWIDE GROUP OF FORMER AIG SHAREHOLDERS IS PREEMPTED Here, the Attorney General purports to use the Martin Act not in response to any injury inflicted on the State of New York, but instead to collect damages on behalf of a nationwide class of all holders of AIG stock who were purportedly -20- injured by the defendants’ alleged conduct. This action is indistinguishable in every relevant way from the precise type of suits that Congress has determined must be subject to one, uniform set of federal regulations—actions on behalf of a large group of shareholders alleging fraud in connection with nationally traded securities. Thus, assuming the Act by its own terms even authorizes private damages actions like this one, this suit is preempted by federal law. A. The Plain Text Of SLUSA Requires Preemption 1. SLUSA provides that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging,” among other things, “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1). This action satisfies all those criteria. First, this action is unquestionably a “covered class action.” That term is defined to mean, among other things, “any single lawsuit in which damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members.” Id. § 78bb(f)(5)(B). That definition perfectly -21- describes this suit, which seeks damages “on behalf of more than 50 persons” based on common issues of law and fact. Second, this action is “based upon the statutory law of [a] State”—viz., the Martin Act. Third, the action is based upon allegations of “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security”—there is no dispute that AIG stock was a “covered security” within the meaning of SLUSA. The only question, then, is whether this is a suit “maintained … by any private party.” The answer is yes. There is a recognized distinction between actions brought on behalf of the State and private actions in which the State is only a nominal party. The State sues on its own behalf when, for example, it is exercising “sovereign power over individuals and entities within the relevant jurisdiction,” i.e., “to create and enforce a legal code, both civil and criminal.” Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 601 (1982). And the State may also sue to protect “quasi-sovereign” interests under the parens patriae doctrine. Id. at 607. But the Attorney General is doing neither of those things in this case. Indeed, each of his attempts to explain how this suit advances a sovereign or quasi- sovereign interest misses the mark. With respect to sovereign interests, the -22- Attorney General repeatedly lauds the benefits of “enforcement action[s].” Resp. Br. at 49-50. But the whole point is that this is not an enforcement action; it is instead an action to collect money damages for private injuries suffered by private shareholders. The only time the Attorney General specifically discusses suits for damages is when he observes that they “deter[] frauds.” Id. at 51. That is true, but that interest is far from sovereign—as the U.S. Supreme Court has recognized, it is served equally well by private securities fraud suits. See Dura Pharm., 544 U.S. at 345 (“The securities statutes seek to maintain public confidence in the marketplace ... by deterring fraud, in part, through the availability of private securities fraud actions.”). Nor does the Attorney General further any quasi-sovereign interest through a damages action. He acknowledges that to maintain a parens patriae action, he must show “‘a quasi-sovereign interest distinct from that of a particular party.’” Resp. Br. at 54 (quoting People ex rel. Spitzer v. Grasso, 11 N.Y.3d 64, 69 n.4 (2008)) (emphasis added); see also Snapp, 458 U.S. at 607 (“In order to maintain [a parens patriae] action, the State must articulate an interest apart from the interests of particular private parties, i.e., the State must be more than a nominal party.”). Yet nothing in any interest the Attorney General purports to further is “distinct” from the private interests inherent in any damages action. The only interest he describes, in fact, is the State’s “interest in the ‘economic well-being’ of -23- its residents”—and that interest surely motivates the private plaintiffs as well. At bottom, then, the Attorney General is suing simply for the “vindication of the private interests of third parties.” New York ex rel. Vacco v. Operation Rescue Nat’l, 80 F.3d 64, 71-72 (2d Cir 1996). And it is well settled that where (as here) a State “seeks to recover money damages for injuries suffered by individuals, the award of money damages will not compensate the state for any harm done to its quasi-sovereign interests,” New York ex rel. Abrams v. Seneci, 817 F.2d 1015, 1017 (2d Cir. 1987)—meaning that “the State is only a nominal party without a real interest of its own.” Snapp, 458 U.S. at 600. Accordingly, while this suit is nominally maintained by the Attorney General, he is, as a legal and practical matter, acting only as the agent of private parties. This suit is thus “maintained by … [a] private party” within the meaning of SLUSA, and it is precluded under the force of that statute. 2. While SLUSA expressly carves out from its preemptive sweep a State’s ability to “investigate and bring enforcement actions,” 15 U.S.C. § 78bb(f)(4), this suit is not an “enforcement action” in any ordinary sense of that term. As explained, States (like the federal government) retain “sovereign power over individuals and entities within the relevant jurisdiction,” i.e., “to create and enforce a legal code, both civil and criminal.” Snapp, 458 U.S. at 601 (emphasis added). And enforcement actions, as ordinarily understood, are actions brought by the -24- State, on behalf of the State, to protect the State’s sovereign interest. Yet the State’s sovereign power does not extend to bringing actions solely on behalf of private individuals to recover money damages, see, e.g., Seneci, 817 F.2d at 1017—in such cases, “the State is only a nominal party without a real interest of its own,” Snapp, 458 U.S. at 600. If the State has no “real interest,” it certainly cannot bring an enforcement action to protect a nonexistent sovereign one. That is why the SEC’s enforcement authority, for example, extends to injunctive relief and civil penalties, but not to suits seeking to recover private damages suffered by individuals. See, e.g., Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 166 (2008) (noting distinction between private damages action and SEC enforcement authority); Aaron v. SEC, 446 U.S. 680, 685-86 & n.3 (1980). No one would describe a private suit as an “enforcement action.” Yet a private suit, in purpose and effect, is exactly what this case is. This suit is thus preempted under SLUSA. B. Preemption Is Also Required By The Purpose Of The Federal Securities Laws To Create A Uniform System Of Federal Regulations The purposes behind the federal securities laws confirm that this action is preempted. Congress enacted the PSLRA, NSMIA, and SLUSA “to provide national, uniform standards for the securities markets and nationally marketed securities.” Lander, 251 F.3d at 111. These measures embody Congress’s -25- recognition of “the benefits flowing to investors from a uniform national approach” and Congress’s considered judgment that those benefits outweigh competing federalism interests. S. Rep. No. 105-182, at 3-4 (1998). The federal securities laws aim to prevent any single State from “impos[ing] the risks and costs of its peculiar litigation system on all national issuers,” and to eliminate “[d]isparate, and shifting, state litigation procedures,” which may create “significant liability that cannot easily be evaluated in advance, or assessed when a statement is made.” Id. at 3, 5. Indeed, a primary motivation behind SLUSA was the realization that the goals of the PSLRA had been frustrated by a dramatic increase in the number of securities cases filed in state court to avoid the PSLRA’s tougher requirements—“a ‘substitution effect’ whereby plaintiff’s counsel file state court complaints when the underlying facts appear not to satisfy new, more stringent federal pleading requirements, or otherwise seek to avoid the substantive or procedural provisions of the [PSLRA].” S. Rep. No. 105-182, at 3 (quotation omitted). SLUSA represents Congress’s conscious decision to foreclose the option of resorting to state law as an end-run around federal standards in securities class actions. This action is precisely the type of litigation that Congress sought to eliminate. It is in substance a private damages action on behalf of a large group of beneficiaries. Yet instead of having to operate under the uniform substantive and -26- procedural protections afforded by federal law—as the private federal securities class action currently pending in the Southern District of New York must —the Attorney General here attempts to proceed under much more forgiving state standards, including the lack of any requirement that the Attorney General demonstrate scienter before collecting damages for a purported fraud. And lest there be any doubt, this state-law regime reaches far past New York’s borders; as explained earlier, the Martin Act’s vast geographic reach grants the Attorney General de facto nationwide authority. For these reasons, it is not “absurd,” Resp. Br. at 81, to read SLUSA as preempting state securities fraud suits that are little more than private damages actions in disguise. The Attorney General goes to great lengths to explain that SLUSA does not preclude state enforcement actions, see id. at 75-80, but again, all agree on that straightforward point. The real question in this case is whether there is any basis for thinking that the Congress that enacted SLUSA wanted to allow state Attorneys General—but not the SEC, see supra at 24—to bring private damages actions, under a dramatically lower standard of proof, against companies participating in a highly regulated and quintessentially national market. The answer is no, both as a matter of law and of logic. If this suit goes forward, the State of New York will be able to “impose the risks and costs of its peculiar litigation system on all national issuers,” and to -27- create “significant liability that cannot easily be evaluated in advance, or assessed when a statement is made.” S. Rep. No. 105-182, at 3, 5 (1998). That is precisely the result Congress intended to avoid through the PSLRA, NSMIA, and SLUSA. Accordingly, the purpose of the federal securities laws require preemption of this action. IV. FEDERALISM SUPPORTS ONE, UNIFORM FEDERAL STANDARD IN THE CIRCUMSTANCES OF THIS CASE A damages action on behalf of private individuals in no way protects the State’s sovereign interests. And Martin Act actions such as this one, which is being pursued on behalf of an identified class of private securities shareholders, have serious consequences far beyond the borders of this State. A proper conception of federalism supports the conclusions that one, uniform federal standard should apply to the securities markets, and that this action should be dismissed. 1. “Federalism was our Nation’s own discovery.” U.S. Term Limits v. Thornton, 514 U.S. 779, 838 (1995) (Kennedy, J., concurring). Seeking to enhance the liberty of the citizenry, the Framers of the Constitution “split the atom of sovereignty,” id.; see Alden v. Maine, 527 U.S. 706 (1999), making the federal government responsible for “all matters of national concern,” such as interstate commerce, Baltimore & Ohio R.R. v. Baugh, 149 U.S. 368, 403 (1893), and reserving local matters for the States, Nat’l Fed’n of Indep. Bus. v. Sebelius, 132 S. -28- Ct. 2566, 2577-78 (2012). With responsibility came authority: Just as the States are sovereign in their domains, so too is the federal government in exercising its powers. See Alden, 527 U.S. at 713. Or, as Chief Justice Marshall put it, “[i]f any one proposition could command the universal assent of mankind, we might expect it would be this—that the government of the Union, though limited in its powers, is supreme within its sphere of action.” McCulloch v. Maryland, 17 U.S. 316, 405 (1819). Regulation of the securities markets falls comfortably within that sphere, because securities trading is quintessential interstate commerce. N. Am. Co. v. SEC, 327 U.S. 686, 707 (1946) (“Congress may deal with and affect the ownership of securities in order to protect the freedom of commerce.”); N. Sec. Co. v. United States, 193 U.S. 197, 334-35 (1904). Indeed, as the U.S. Supreme Court has explained, the importance of the federal interest in regulating the national securities markets “cannot be overstated.” Dabit, 547 U.S. at 78. Accordingly, Congress has gone to great lengths to create uniform national standards to regulate the market for nationally traded securities. Lander, 251 F.3d at 111. This approach makes good sense. At best, joint federal-state policing of the interstate securities markets brings about “duplicative and unnecessary litigation” and is “redundant, costly, and ineffective.” See H.R. Rep. No. 104-864, at 39. At worst, dual enforcement leads to the adoption of a welter of different -29- standards and, ultimately, to confusion, chaos, and a loss of investor confidence. See, e.g., Bluebird Partners, L.P. v. First Fidelity Bank, 896 F. Supp. 152, 156 (S.D.N.Y. 1995) (“‘Confusion and uncertainty’ would result if investors’ rights under the federal securities acts were to depend on varying state laws.”); Michael G. Oxley, Who Should Police the Financial Markets?, N.Y. Times, June 9, 2002, at C11 (aggressive policing by States could lead to a “disastrous balkanization of oversight”); Christopher R. Lane, The March Toward Preemption: Resolving Conflicts Between State and Federal Securities Regulators, 39 New Eng. L. Rev. 317, 339 (2005) (“Contrary to the Congressional goals of a national market system, as expressed in the Exchange Act and most recently in the NSMIA, patchwork state settlements could impose heavy burdens on businesses by indirectly imposing structural market changes through state enforcement proceedings.”). 2. The Attorney General’s use of the Martin Act in this case to seek to recover damages on behalf of a class of private investors turns Congress’s comprehensive and carefully crafted scheme on its head. As a general matter, the Act’s sweeping grant of regulatory jurisdiction over the securities markets effectively puts the Attorney General’s enforcement authority on equal footing with that of federal regulators. E.g., Tidman, supra, at 392 n. 92 (describing Martin Act prosecution of a “Japanese swindler who committed a fraud from Miami on some people in Denver”); see also Louise Schiavone, Spitzer Poised to -30- Probe Grasso Pay: The SEC and the New York Attorney General Will Look into Grasso’s $190 Million Compensation, CNN, Jan. 8, 2004, at http://money.cnn.com/2004/01/08/markets/spitzer_grasso/index.htm (then- Attorney General Spitzer describing himself as a “prosecutor-slash-regulator”). Indeed, the Act’s lax standards of proof, including the lack of any requirement of an actual intent to defraud, allow the Attorney General to leap ahead of federal authorities. The Martin Act’s past use demonstrates that the Attorney General is able to impose serious costs far beyond New York’s borders. When brought against New York companies, Martin Act prosecutions have disrupted investor expectations and led to thousands of layoffs. See, e.g., Joseph B. Treaster, Marsh Announces 3,000 Layoffs And Other Cuts As Profit Plunges, N.Y. Times, Nov. 10, 2004, at C1 (describing layoffs in response to Attorney General’s suit against a New York- based company). Yet, as his own website boasts, the Attorney General has filed countless Martin Act suits against companies that reside in other States.4 There is 4 See, e.g., Press Release, New York Attorney General, H&R Block Sued for Fraudulent Marketing of IRAs (Mar. 15, 2006), available at http://www.ag.ny.gov/press-release/hr-block-sued-fraudulent-marketing-iras (describing lawsuit against Missouri-based company); Press Release, New York Attorney General, Federated Settles Mutual Fund Timing Investigation (Nov. 28, 2005), available at http://www.ag.ny.gov/press-release/federated-settles-mutual- fund-timing-investigation (announcing $80,000,000 settlement with Federated Investors, Inc., a “Pittsburgh-based company”); see also People ex rel. Cuomo v. Coventry First LLC, 52 A.D.3d 345 (2008) (affirming dismissal of Martin Act suit -31- no reason to think that these suits do not cause similar consequences, stripping assets from out-of-state investors, threatening the jobs of out-of-state workers, and causing lasting damage to out-of-state economies. These externalities—and the friction they generate—are precisely what led the Framers to give Congress control over interstate commerce in the first place. See, e.g., The Federalist No. 7 (Alexander Hamilton) (“The opportunities which some States would have of rendering others tributary to them by commercial regulations would be impatiently submitted to by the tributary States.”); Martin H. Redish & Shane V. Nugent, The Dormant Commerce Clause and the Constitutional Balance of Federalism, 1987 Duke L.J. 569, 586-87 (“[T]he framers were clearly aware of the dangers of interstate economic friction, and chose to deal with the problem solely by the vesting of a power in Congress….”). To be sure, that the Attorney General’s use of the Martin Act can impose costs beyond New York’s borders is not itself a reason to preempt its use—one consequence of our federal system is that a State’s actions meant to protect its own sovereign interests can sometimes have effects on other States, or even on the Nation as a whole. In those circumstances, Congress must carefully weigh the state interest in asserting its sovereign authority against the externalities such state against Pennsylvania company); State v. Justin, 779 N.Y.S.2d 717, 722 (2003) (suit against FNIC, “a securities broker-dealer with its principal place of business in California”). -32- action may impose on the national economy. In the federal securities statutes, Congress has determined to preserve state sovereign authority—both SLUSA and the NSMIA expressly save from preemption enforcement actions brought by state authorities, whose purpose is to protect legitimate sovereign interests of the State. See supra at 11. The Attorney General’s exercise of authority under the Martin Act to protect the sovereign interests of New York can thus be consistent with federalism principles despite its imposition of costs well beyond New York’s borders. The propriety of such state action is, of course, a question for Congress to decide in the first instance. It is entirely another matter, however, for the Attorney General to impose New York law on the entire Nation when there is no sovereign interest at stake. No principle of federalism would support that result—yet that is exactly what the Attorney General seeks to do. This action does not enforce any of New York’s sovereign interests; instead, it seeks money damages on behalf of AIG shareholders worldwide. If allowed to proceed here, the Attorney General would have free rein to sue any corporation in the Nation whose shares are traded on a New York exchange, seeking to hold them liable for money damages under lax substantive and procedural standards that Congress has expressly rejected as contrary to national policy. While Congress undoubtedly had good reason to exempt true enforcement actions from the preemptive scope of the federal securities laws, Congress could have had no reason to exempt an action such as this, which serves no sovereign state interest at all. It is not surprising, then, that the text and purpose of the federal securities laws squarely preempt this action. The judgment below is incorrect, and ought to be set aside. CONCLUSION The judgment of the Appellate Division should be reversed. ANDREW J. FRACKMAN ANTON METLITSKY O'MELVENY & MYERS LLP 7 Tin1es Square New York, New York 10036 (212) 326-2000 -33- Respectfully submitted, V::o!t~f2~!r DEANNA RICE O'MELVENY & MYERS LLP 1625 Eye St., N.W. Washington, D.C. 20006 (202) 383-5300 ADDENDUM The names and former official positions of amici curiae are as follows: • The Honorable Paul S. Atkins—Commissioner of the U.S. Securities and Exchange Commission (2002-2008) • The Honorable Rudolph W. Giuliani—Mayor of New York City (1994- 2001); United States Attorney, Southern District of New York (1983- 1989); United States Associate Attorney General (1981-1983) • The Honorable F. Chris Gorman—Attorney General of Kentucky (1992- 1996) • The Honorable Andrew P. Miller—Attorney General of Virginia (1970- 1977) • The Honorable Michael G. Oxley—U.S. House of Representatives (1981-2007); Chairman of the Financial Services Committee (2001- 2007) • The Honorable George E. Pataki—Governor of New York (1995-2006) • The Honorable Richard L. Thornburgh—Governor of Pennsylvania (1979-1987); Attorney General of the United States (1988-1991) • The Honorable Anthony F. Troy—Attorney General of Virginia (1977- 1978) • The Honorable Dennis C. Vacco—Attorney General of New York (1995- 1998) • The Honorable William F. Weld—Governor of Massachusetts (1991- 1997); Assistant United States Attorney General (1986-1988); United States Attorney, District of Massachusetts (1981-1986)