A bunchofoutlets reported yesterday that New York Attorney General Eric Schneiderman subpoenaed seven of the world’s largest banks over the London Inter-Bank Offered Rate (LIBOR) imbroglio this past month. The Financial Times’ version of the story, by Shahien Nasiripour and Tracy Alloway, is the only one I saw that hinted at the true significance of Schneiderman’s subpoenas:
The state investigation comes on the heels of separate probes from prosecutors and regulators in countries including the UK, Canada, Japan and the US who are examining possible collusion by large financial groups to manipulate benchmark rates. But what may set Mr Schneiderman’s probe apart is his ability to use the Martin Act, a 1921 New York law considered one of the country’s most powerful prosecutorial tools. The law allows Mr Schneiderman to investigate anyone doing business in New York and to bring cases without having to show that the accused intended to commit fraud.
In a world where most financial regulators have small-bore weapons, The Martin Act is like an elephant rifle. In the early 2000s, it was an aggressive interpretation of the Martin Act that allowed then-Attorney General Elliot Spitzer, acting on behalf of investors, to hold Wall Street accountable in a manner that many have clamored for since the financial crisis (i.e. people ended up in jail*). The Act has weathered a long and tortured history since its passage in the 1920s, recounted in our May/June Issue by legal scholar David Skeel and in the sadly defunct Legal Affairs by the newyorker.com’s Nicholas Thompson. But given Schneiderman's moves this week and the way the law has been re-interpreted recently in New York Courts, it's possible we'll look back on yesterday's news as confirmation that we're in the middle of a major shift in the bank-investor balance of power.
*Among them was Henry Blodget, whose Business Insider has remained curiously silent on these subpoenas. And, while we’re on the topic, Wall Street’s bible, the Journal, is strangely sitting out this story so far.