States Flex Prosecutorial Muscle
Brooke A. Masters
States Flex Prosecutorial Muscle
Attorneys General Move Into What Was Once Federal Territory
By Brooke A. Masters
Washington Post Staff Writer
Wednesday, January 12, 2005; Page A01
Are drug companies using deceptive marketing? Connecticut is investigating.
Did mortgage financing giant Fannie Mae mislead investors? Ohio has filed
suit alleging securities fraud.
Did mutual funds make improper payoffs to brokers? California brought a
complaint against giant broker Edward D. Jones & Co. last month.
Are power plants contributing to global warming? Eight states have combined
to sue to force big utilities to cut their emissions of carbon dioxide.
Americans once relied primarily on an alphabet soup of federal agencies --
SEC, FTC, EPA -- to protect investors, consumers and the environment. But
state regulators and attorneys general are bringing legal action and
launching investigations in these and other areas where they say federal
regulators have fallen down on the job.
"Our action is the result of federal inaction," said Connecticut Attorney
General Richard Blumenthal, who has brought actions against drug companies,
polluters and the Environmental Protection Agency. "The [Bush]
administration has not just failed to enforce the law, it has sought to
undercut it and gut it. . . . States are filling the vacuum."
The trend is likely to accelerate in Bush's second term, analysts said, as
Democratic state officials attempt to counter market-oriented approaches to
issues such as drug safety, antitrust enforcement and the environment.
"If the administration's new appointees are perceived as being soft or less
aggressive, it will encourage the state regulators to step in," said Henry
T.C. Hu, a University of Texas law professor.
The motivation of state officials, analysts say, is both principle and
politics -- 43 of the state attorneys general are elected, and analysts
routinely refer to the nationwide attorneys general group as the National
Association of Aspiring Governors.
In fact, New York Attorney General Eliot L. Spitzer, whose aggressive
investigations of Wall Street and other industries have kept him in the
spotlight, has announced that he is running for governor of New York.
Critics call the recent spate of state actions "the Spitzer effect," arguing
that other state officials are hoping to duplicate his success.
That prospect worries federal prosecutors and regulators who complain that
the state initiatives sometimes complicate their efforts to punish
lawbreakers and set workable national standards. "There is a legitimate role
for state regulation of business in our federal system of government.
However, a proliferation of conflicting state rules can create inefficiency
and inflexibility in our national economy," said John D. Graham, head of the
Office of Management and Budget's Office of Information and Regulatory
Business groups argue that they are being hit with conflicting demands from
ambitious politicians more interested in making headlines than consistent,
"The overreaching of the state attorneys general is a problem that is
growing," said Lisa Rickard, head of the U.S. Chamber of Commerce's
Institute for Legal Reform, which sponsored a study last fall of
class-action suits brought by attorneys general and may mount challenges to
state actions it considers inappropriate. "They're trying to legislate and
they are trying to regulate through litigation."
Activism is not limited to state attorneys general. State treasurers and the
heads of state pension funds have been pushing big companies for corporate
reforms. Although key environmental and banking cases are still pending, so
far the states are doing well. Many corporate targets have settled and
agreed to changes, and a federal judge ruled preliminarily for the states in
one landmark clean air case.
"We are right on the facts. This isn't new regulation. It's enforcement of
existing statutes," Spitzer said. Conservatives "pushed for federalism to
begin with," he said. "They were trying to limit federal enforcement. They
are now paying for the Frankenstein they created."
Spitzer recently predicted that he will need to bring fewer cases against
Wall Street because the federal regulator, the Securities and Exchange
Commission, has become more aggressive in the wake of his earlier probes.
Historians and policy analysts say the current activism was decades in the
making. "Regulatory competition is as old as the Constitution," said Eugene
A. Ludwig, who clashed and cooperated with state banking regulators as
comptroller of the currency in the 1990s. "It's inherent in our form of
government," which gives federal and state officials overlapping
In the 1970s, federal officials, acknowledging they couldn't do everything,
gave grants to states to beef up consumer and investor protection. The flow
of cash dried up after Ronald Reagan was elected president, but the bench
strength built up in state legal offices didn't wither and die. Instead,
states began cooperating and finding new targets. In 1984, six states in the
Northeast sued to force Reagan's EPA to order pollution cuts, and 21 states
teamed up to challenge a proposed settlement in a federal class-action
securities fraud case in 1985.
Reagan and his successor, George H.W. Bush, also appointed judges who
supported states' rights, arguing that Congress and federal regulators had
overstepped their authority. Some of those same judges are now hearing the
current crop of state lawsuits.
When Bill Clinton was elected president, his administration began bringing
more federal environmental and antitrust actions. Most state attorneys
general backed off or coordinated their actions with the federal government.
"It's cyclical. If you have an activist regulator at the federal level, it
doesn't leave a lot of room for states," said Roger Noll, a Stanford
University economics professor who studies regulation.
The dynamics changed again in the mid-1990s, when governors pushed for
welfare changes and some state attorneys general sued the tobacco industry
for consumer fraud. The tobacco settlement generated billions of dollars for
state coffers and convinced even more state attorneys general of the
advantages of working together.
"Twenty years ago, I did a bunch of [consumer protection] cases against
local drugstores," said James E. Tierney, a former Maine state attorney
general who now heads Columbia Law School's National State Attorneys General
Program. "Today, what Rite Aid does in Lisbon Falls, Maine, Rite Aid does in
The tobacco lawsuits also introduced some state officials to a new resource:
plaintiffs' law firms that work on contingency. New Mexico has used the
tactic in environmental cases, and California's insurance commissioner this
fall hired a class-action law firm to sue several insurance carriers over
Many of today's activist state officials are Democrats who favor increased
regulation, while the federal agencies are almost exclusively led by
Republicans who favor free markets. Democratic California Attorney General
Bill Lockyer has officially challenged the Bush administration nearly two
dozen times, his office calculates.
Some attorneys general don't approve of the new activism. "Some [state
officials] are forgetting that any time you announce you are investigating
an industry, you cause the stock to drop, and you have real people,
hardworking people, losing money," said Virginia Attorney General Jerry
Kilgore (R). "We have to be careful and take a more reasoned and slow
When more than a dozen state attorneys general -- led by Spitzer -- sued to
block a Bush administration policy that allowed older power plants to
upgrade without meeting new pollution standards, Kilgore organized a
coalition of nine states on the federal government's side. "We need to
expand our energy options. Virginia is a coal-producing state," he said.
The divisions aren't entirely along partisan lines. Northeastern Republicans
have joined some of the environmental lawsuits, and Republican Attorney
General Jim Petro of Ohio has sued Fannie Mae, alleging the mortgage funding
giant's accounting methods misled and damaged his state's pension and
insurance funds. The SEC's chief accountant has told Fannie its accounting
was faulty, but the agency has not brought a case against the company. "We
are not going to sit back and wait for the federal government where we
perceive there is damage being done," Petro said.
As states have become more active, businesses have protested.
The power industry, for example, has fought lawsuits seeking new limits on
carbon dioxide emissions -- often blamed for global warming -- something the
Bush administration has declined to do. "Global climate change is an
international and national issue that states and localities cannot
effectively address," said Bill Fang, climate issue director for the utility
industry's Edison Electric Institute. "The CO 2 lawsuits . . . are improper
attempts to circumvent the federal legislative process and engage in
Cynthia Bergman, an EPA spokeswoman, said in an e-mail that the agency
differs from states in its approach. "States have the right to take action
against a particular utility," she wrote. "But at the federal level, we
prefer to require ALL power plants to reduce emissions, not just go after
them one by one -- that process takes too long."
Drug manufacturers, too, are being hit with multiple state investigations,
as well as product liability and consumer protection lawsuits. Recently
they've started to argue in court -- sometimes supported by Bush
administration lawyers -- that having Food and Drug Administration approval
should protect them from many state lawsuits.
"Having a patchwork quilt of rules and regulation from many different states
makes compliance challenging. That's why Congress has given FDA final
regulatory authority," said Marjorie Powell, senior associate general
counsel of the Pharmaceutical Research and Manufacturers of America.
Federal prosecutors and regulators worry that activist state officials might
interfere with their own investigations. In 2003, Oklahoma Attorney General
Drew Edmonds angered the Justice Department by filing criminal charges
against WorldCom Inc. officials, including several who were cooperating with
the federal government, and former chief executive Bernard J. Ebbers, who at
that time had not been charged with wrongdoing.
Edmonds, a Democrat, said he jumped in because he feared the federal
government would never charge Ebbers with fraud in connection with the
firm's $11 billion accounting restatement. He said he had previously been
frustrated by a federal investigation of the Oklahoma Corporation Commission
in which the state's statute of limitations had lapsed by the time federal
prosecutors announced they were not bringing charges.
After U.S. Attorney David N. Kelley of Manhattan flew to Oklahoma to meet
with him, Edmonds agreed to delay his case. Ebbers has pleaded not guilty to
all the charges.
Former EPA administrator Christine Todd Whitman, a Republican who also
served as New Jersey's governor, says she can see both sides of the issue.
"The federal government should set the broad basic standard, but if states
can figure out better ways to do it for themselves, they should be able to,"
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