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Investigating The Ratings Agencies

"Too little. Too late."
That’s how New York Attorney General Andrew Cuomo described the reforms proposed by Standard & Poor's and Moody's Investors Service in the wake of the subprime debt ratings catastrophe. Both S&P and Moody’s have recently announced plans to strengthen their ratings system in an attempt to restore their credibility and fend off regulatory or legislative action. But these proposals—which include rating have been met with skepticism and mockery. (More mockery here.) Cuomo referred to them as “supposed reforms.”
“Both S&P and Moody's are attempting to make piece-meal changes that seem more like public relations window dressing than systemic reform,'' Cuomo said in a statement about his investigation into the ratings agency.
Cuomo didn't describe exactly what actions his office is planning on taking, but according to Charlie Gasparino and the Wall Street Journal he is considering employing the Martin Act to go after wrong-doing in the mortgage meltdown. This is the breathtakingly powerful state securities law that grants the Attorney General broad investigatory and prosecutorial powers. It lay nearly dormant for three-quarters of a century after it was passed. The Martin Act was used to go after smaller boiler room type operations but never against the big Wall Street firms. At least, not until Eliot Spitzer discovered the law and used it to tear into Merrill Lynch. After that, Spitzer rampaged across Wall Street wielding the Martin Act to force enormous settlements from a dozen or so firms.
Why is the Martin Act such a big deal? A 2004 Legal Affairs article by Nicholas Thompson describes the terrifying power of the AG under the law:

To win a case, the AG doesn't have to prove that the defendant intended to defraud anyone, that a transaction took place, or that anyone actually was defrauded. Plus, when the prosecution is over, trial lawyers can gain access to the hoards of documents that the act has churned up and use them as the basis for civil suits. "It's the legal equivalent of a weapon of mass destruction," said a lawyer at a major New York firm who represents defendants in Martin Act cases (and who didn't want his name used because he feared retribution by Spitzer). "The damage that can be done under the statute is unlimited."

Interestingly, Spitzer first hatched the plan to use the Martin Act against Wall Street after a meeting with a securities lawyer named Eric Dinallo—the same guy who has been attempting to strong arm Wall Street into bailing out Ambac.
Cuomo Says S&P, Moody's Reforms Won't Stop His Probe [Bloomberg]