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State attorneys general are no longer simply chasing telemarketers and cross-border pyramid schemes. They are taking on global giants, from Wall Street to the pharmaceuticals industry, and business is complaining.

By Jenny Anderson
July 2002
Institutional Investor Magazine

"Our job is to enforce the law if companies violate it," says Alabama Attorney General Bill Pryor. "Our role is not to use that threat of litigation to restructure the marketplace. That is more properly done through legislation or regulation."

Pryor's voice is an increasingly lonely one. The scope of actions undertaken by the states in recent months is breathtaking and unprecedented. In May, for example, New York Attorney General Eliot Spitzer muscled Merrill Lynch & Co. into ponying up $100 million to settle a ten-month investigation that uncovered e-mails revealing that analysts had issued false and misleading stock recommendations to win banking business. Merrill also agreed to change the way it issues research reports and how it evaluates and pays its analysts.

In June, 29 states announced that they were suing Bristol-Myers Squibb Co. for fraudulently preventing a cheaper, generic version of its cancer-fighting drug, Taxol, from getting to market. Several state attorneys general are considering whether to challenge the proposed $26 billion merger of satellite television companies EchoStar Communications Corp. and DirecTV on antitrust grounds. And after rejecting the antitrust deal the federal government cut with Microsoft Corp. in November 2001, nine states and the District of Columbia continue to battle the software maker in court, seeking harsher penalties.

For the denizens of Wall Street and America's corporate boardrooms, the surge of activism by state attorneys general may present the biggest threat to their way of doing business -- to say nothing of their financial well-being -- since the plaintiffs' bar made the Dalkon Shield and asbestos synonyms for personal injury. Although Merrill Lynch admitted no wrongdoing in its settlement, the e-mails open the firm to hundreds of millions of dollars in potential liabilities from civil litigation. "The e-mails are overwhelming in demonstrating the breach of the responsibility that investment banks have to render fair, objective advice," says Spitzer.

Like the trial lawyers, the state AGs increase the cost of doing business and, critics complain, occasionally step over the line. They say that AGs too often have weak cases but rely on their collective power to bully companies into settling rather than fighting long, costly battles. The states also draw fire for usurping the roles of regulators like the Department of Justice, the National Association of Securities Dealers and the Securities and Exchange Commission.