Cuomo Follows Spitzer's Path, With New Twists

Paul Radvany in Law360.com, September 11, 2008

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By Shannon Henson

Law360, New York (September 11, 2008) -- While taking a different tack, New York Attorney General Andrew Cuomo has followed the lead of his controversial predecessor by intensely scrutinizing financial institutions, notably investigating the student loan industry and the auction rate securities market.

During his almost two-year tenure as the state's highest law enforcement officer, Cuomo has entered into a number of multibillion-dollar settlements with banks related to auction rate securities and has also made deals in a crackdown on student loan lenders. However, lawyers and law professors say he's kept a lower profile than Eliot Spitzer did.

"He doesn't seem to consider himself the new sheriff of Wall Street, but he has taken appropriate action where it was necessary," said Paul Radvany, an associate professor at Fordham Law School.

Spitzer, who resigned as the governor of New York earlier this year amid a prostitution scandal, was known for having little mercy on the financial markets when he served as attorney general. He helmed a a series of high-profile investigations that won him enemies, headlines and public popularity. Spitzer won his second term as attorney general in 2002 by 66 percent of the vote.

While attorneys general have historically taken the role of consumer advocate, Spitzer spent a good deal of his time focusing on Wall Street. He aggressively went after the mutual fund industry, boasting almost $4 billion in settlements after accusing companies of allowing their brokers to engage in market timing and late trading.

Spitzer also set his sights on insurance brokers, filing suits and winning pricey settlements after accusing big players such as American International Group Inc. and Marsh & McLellan Cos. of being involved in a bid-rigging scheme that overcharged policyholders.

And Spitzer engaged in a very public, and ultimately unsuccessful, battle with former New York Stock Exchange Chairman Richard Grasso over his $187.5 million severance package.

Experts noted recently that the New York attorney general's office is in a unique position to regulate the financial industry because of the way the industry is set up. So, in a way, it's logical for Cuomo to follow the path paved, in part, by Spitzer.

“It makes sense because so many financial services companies and banks are located in New York,” said Ronald Colombo, an associate professor at Hofstra University School of Law. “The attorney general's jurisdiction over those banks gives him a national reach. He can impose standards across the country, sort of like California can impose standards relating to the environment and product liability.”

Chris Conniff, a partner in Ropes & Gray LLP's government enforcement group, said it's no surprise that the New York attorney general would focus on the financial industry, since it's headquartered in the city.

However, “the past two attorneys general have been more involved in law enforcement-related activities in the financial industry than their predecessors,” he said.

But while the road taken is somewhat expected, Colombo said Cuomo deserved credit for being quick to pay attention to the subprime mortgage crisis and auction rate securities debacle.

“He really does seem to be on top of things. In the field of securities law and regulation, he's using the powers of his office effectively and aggressively and, after Spitzer, maybe you could say predictably as well.”

Radvany, who is a former federal prosecutor with the U.S. Attorney’s Office for the Southern District of New York, said that Cuomo responded quickly to issues that have materialized during his tenure, citing how he entered into settlements related to auction rate securities.

“He was quick to respond and was a leader among attorneys general, quickly and forcefully ensuring that investors would recoup their investments,” he said.

In the case of auction rate securities, Cuomo took notice when the $330 billion market went bust in mid-February amid growing panic over the deepening subprime crisis.

Without enough bidders willing to participate in periodic auctions, many who bought auction rate securities were left holding financial instruments they weren't able to sell. Cuomo and others started sniffing around the conduct of the investment banks that sold the securities, accusing some of them of misrepresenting the risk.

In August, Cuomo penned settlements with Merrill Lynch & Co. Inc., Deutsche Bank AG and Goldman Sachs Group Inc., with the three banks agreeing to pay civil penalties totaling $170.5 million and repurchase billions of dollars in auction rate securities at par value.

He also won agreements with Citigroup Inc., which agreed to buy back $19.5 billion of the securities from customers and pay a $100 million fine; UBS AG, which agreed to buy back $18.6 billion of the securities and pay a $150 million civil penalty; and Morgan Stanley and JPMorgan Chase & Co., which agreed to buy back a total of $7 billion in the securities from retail customers, charities and small to mid-sized businesses, and pay fines of $35 million and $25 million, respectively.

Radvany also gave Cuomo credit for his groundbreaking work with the student loan industry.

Earlier this month, Cuomo got eight student loan companies to adopt new standards that ban a variety of industry marketing practices, including mailings designed to look like they came from the federal government and the advertising of interest rates not available to most customers. Seven of the companies said they would contribute to a fund to educate students and parents about financial aid.

He has also reached agreements with student loan companies Citibank NA, Sallie Mae, JPMorgan Chase, Bank of America, Wells Fargo and Wachovia.

People were prepared for big moves from Cuomo from the start when he recruited federal prosecutors, including Eric Corngold and Benjamin Lawsky, to join the staff.

“He started off on the right foot with hiring highly qualified top deputies, a number of whom are former federal prosecutors,” Radvany said.

Cuomo also beefed up the civil rights, public corruption and health care fraud units in the office, and will likely continue to pursue cases in these areas during the remainder of his term, Radvany said.

In Radvany's assessment, Cuomo and Spitzer have been "equally successful," even with Cuomo's lower profile. Cuomo has "let investigations and settlements speak for themselves,” Radvany said.