Next N.Y. attorney general will wield power in financial circles

Do not underestimate how much authority that office really has, political expert says

By Bruce Kelly

Mar 7, 2010 @ 12:01 am (Updated 3:39 pm) EST

Regardless of the political or business climate, the next New York attorney general will wield considerable power over bankers and brokers.

“Never underestimate the power of the New York attorney general's office,” said Evan Stavisky, a Democratic political consultant. “It's probably the most powerful state attorney general's office in the nation in the area of financial regulation.”

There are two reasons for the office's scope.

“It's the location of the financial markets in New York state, combined with the [state] the Martin Act to investigate financial fraud. The office has an incredibly long reach,” Mr. Stavisky said.

“In the past, [Attorney General Andrew] Cuomo and [former Attorney General Eliot] Spitzer made a huge reverberation on Wall Street. That makes it clear that the attorney general's jurisdiction over Wall Street is not going away,” Mr. Stavisky said.

To be decided in November, the race for New York attorney general is still in its early stages.

Prominent candidates are waiting for Mr. Cuomo to an-nounce his candidacy for New York governor, as is expected.

The field in the attorney general race, however, is taking shape, with three leading pro-spective candidates.

The three, all Democrats, are Kathleen Rice, district attorney for Nassau County, one of the most populous in the country, Eric Dinallo, former New York state insurance commissioner and an aide to Mr. Spitzer when he was attorney general, and Sean Coffey, until recently a prominent class action attorney, who had a 30-year career as a naval officer and pilot.

Respectively, they had raised $2.4 million, $1.8 million and $1.7 million for the race, according to state records released in January.

When it comes to policing Wall Street, political experts said that local politics and business interests may bog down the office and significantly shorten the attorney general's reach.

“The No. 1 question is: Will the next attorney general focus on Wall Street or a highly dysfunctional New York state government?” said John Coffee, the Adolf A. Berle Professor of Law at Columbia University.

And the sharp economic downturn may also have a significant impact on how the next New York attorney general regards Wall Street.

“The polling data says that the public wants to hang Wall Street, but because Wall Street is the lifeblood of New York City's and New York state's economy, there has to be a balance,” said Hank Sheinkopf, a campaign consultant. “It's the one industry we have that is New York-centric and -based.”

Mr. Spitzer, who was also the state's governor, transformed its top lawyer's office when he took a cudgel to investment banks in 2002 to break up the cozy relationship between bankers and stock analysts.

That cemented the office's role as a regulator to be feared and loathed. Wall Street traders were jubilant when Mr. Spitzer resigned as New York's governor amid a prostitution scandal, industry observers said.

Mr. Dinallo said that although he would work to protect in-vestors from scams such as boiler rooms, he would investigate Wall Street companies if Congress didn't pass legislation to protect investors from the mistakes of large institutions such as American International Group Inc.

“If [Congress doesn't] get regulatory reform right, then look for the attorney general's office investigating how companies hold themselves out, and ask if companies have adequate capital behind positions,” said Mr. Dinallo, who was instrumental in pushing Mr. Spitzer to use the Martin Act.

“I want Congress to succeed on this,” Mr. Dinallo said. “The attorney general's office is a great force for protecting investors, but the attorney general's office can step up and protect individuals from large institutions.”

Due to his lack of political experience, Mr. Coffey said that he is an “agent of change” needed in Albany, New York's capital.

The next New York attorney general should look at “boards of directors that have been somewhat lax,” he said. Directors have to be more vigilant to uphold the interests of shareholders, Mr. Coffey said.

A focus on Wall Street gatekeepers such as auditors, ratings agencies, bankers and lawyers is also necessary, he said.

Mr. Coffey expressed optimism that Wall Street investment banks and broker-dealers will welcome a strong regulator.

“I don't think there's anything inconsistent with vigorous oversight of Wall Street and helping Wall Street to grow,” he said. Cleaning out bad apples is good for business, Mr. Coffey said.

In an e-mail, Ms. Rice wrote: “New York voters deserve an attorney general who understands the need for both adequate regulation of Wall Street and the need for our financial sector to remain vibrant and creating jobs. I understand that balance and Wall Street's importance to our state and national economies, and most importantly, I understand the need for its players to play by the rules and for those rules to be improved in many areas.”

E-mail Bruce Kelly at bkelly@investmentnews.com.