The competition is fierce for the worst law in America, but our pick goes to New York State’s notorious Martin Act. Now an effort is building in Congress that could curb its worst excesses and help the innocent.
Passed in 1921 to stop “boiler-room” stock-sale operations, the Martin Act lets prosecutors call almost anything fraud, and there’s no requirement to prove evil intent in civil cases. Yet proving scienter, or the intent or knowledge of wrongdoing, has been a staple requirement of British and American law for centuries lest innocent mistakes be prosecuted as intentional frauds. The Martin Act thus gives prosecutors a huge legal advantage against defendants, though for decades it was used sparingly.
That changed in the early 2000s when then New York Attorney General Eliot Spitzer wielded the Martin Act to bludgeon settlements out of big Wall Street firms without going to court. The law does particular damage because New York is America’s financial capital and nearly every company sooner or later does business there. Note how Mr. Spitzer’s equally unconstrained successor, Eric Schneiderman, is leveraging the Martin Act to investigate Exxon for purportedly misleading the public about climate change.
Prosecutors don’t want to give up this immense power, and legislators in New York have been loath to challenge them. But Congress has the power to act under the Constitution’s Commerce Clause. Legislation introduced last month by Rep. Tom MacArthur (R., N.J.) would address the problem by pre-empting state enforcement of civil securities fraud.
