Corporate America declares war on 'Spitzerism'

WASHINGTON -- Eliot Spitzer is a hero to millions of consumers and small investors, but he has become enemy No. 1 to many in Corporate America, who are now battling to muzzle him and other crusading state regulators.

The U.S. Chamber of Commerce yesterday called on the U.S. Congress and states to curb state attorneys-general, whom it alleges are encroaching on federal jurisdiction and shaking down businesses for multimillion-dollar settlements.

"It is time to rein in activist attorneys-general," said Lisa Rickard, president of the chamber's Institute for Legal Reform.

"They operate with little regard for the authority of state and federal legislators, and their contingency-fee deals with private plaintiffs' attorneys undermine the public's faith in government."

She and other participants in a chamber-sponsored conference in Washington complained that "Spitzerism" has become a dangerous model for ambitious regulators.

Mr. Spitzer, the New York Attorney-General, is likewise no fan of the U.S. Chamber of Commerce, the largest business group in the country. He recently fired back at his critics, calling chamber president Tom Donohue "a shill for guilty people, [who] has never once found a crime he couldn't justify, as long as it was committed by one of his dues-paying members."

Mr. Spitzer has won massive financial settlements from Wall Street brokers, mutual funds and insurance brokers under threat of prosecution and public shame. He recently set his sights on makers of computer spyware. But two new studies released at the conference argue that state officials are supplanting federal regulators and softening corporate targets for private class-action lawsuits.

Michael Greve, an adjunct scholar at the conservative American Enterprise Institute and author of one of the studies, said the Spitzer model amounts to government by indictment. "Indictments are so fatal that target companies have no choice but to settle," he said. "The secret to these cases is that they never get to court."

He suggested that some state attorneys-general have strayed beyond their constitutional bounds, inappropriately forcing federal regulators to play catch-up. Mr. Greve called the trend "upside-down federalism."

The effect, according to Mr. Greve, is to reregulate major sectors of the U.S. economy, create new business cartels and shift power to plaintiffs' lawyers.

"The claimed power to determine when the federal system has failed is the power to run the system," he concluded in his study. "Nobody gave the AGs that power. They have arrogated it."

Congress should clip the wings of attorneys-general by passing a law that would make multistate settlements, such as the one struck with Merrill Lynch & Co. and other brokers, subject to congressional approval, Mr. Greve said.

In a second study for the chamber, lawyer John Beisner and two colleagues pointed out that states are striking questionable contingency-fee deals with plaintiffs' lawyers to go after target industries.

Mr. Beisner said such deals result in exorbitant fees for lawyers and put enforcement action into the hands of private lawyers.

"It has become a way for state attorneys-general to reward their political backers," he said.

Steve Bartlett, president and chief executive of the Financial Services Roundtable, said his industry plans to become much more aggressive in fending off such lawsuits. "This abuse of process is not going to go away on its own," said Mr. Bartlett, who speaks for major banks, brokers and insurers.

Six states have already passed laws to provide better disclosure and limit fees in contingency deals between lawyers and states. And yesterday the chamber urged other states to follow suit.