Corporate Enemy No. 1: State Attorneys General

As the Bush administration turns a blind eye to consumer crises, state attorneys general are picking up the slack—and making powerful enemies in the process.

| Thu Dec. 6, 2007 3:00 AM EST

In early November, New York state attorney general Andrew Cuomo issued subpoenas against lenders Fannie Mae and Freddie Mac as part of his office's investigation into whether the mortgage company Washington Mutual had been inflating home appraisals to generate more income on mortgages. The move sent the stock market downward and had the business world in an uproar. Among Cuomo's many critics was the host of CNBC's Mad Money, Jim Cramer, who lashed out at the attorney general on-air.

"This guy is going to shut down the mortgage market," Cramer fumed. "Cuomo is about confiscation. The Chinese are capitalist. We've got a communist here." Cramer blamed Cuomo for causing Washington Mutual to suffer a $5 billion drop in value because the subpoenas prompted investors to flee bank stocks.

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Cramer's tirade is just the latest attack on a state attorney general from the business world. As the Bush administration has largely gutted federal regulatory agencies and failed to respond to several major consumer crises—everything from the meltdown of the subprime-lending industry to the proliferation of lead-painted toys—state attorneys general have used their own state authority and consumer-protection laws to fill the regulatory void. In recent years, they've been increasingly aggressive in going to bat for consumers, policyholders, and homeowners who've been on the receiving end of unsavory business practices left unregulated by the feds.

They've also been at the forefront of controversial litigation designed to limit greenhouse gases and clean up housing contaminated by lead paint. And they've been especially tough in litigation against tobacco companies. Indeed, on Tuesday, several attorneys general filed suit against R.J. Reynolds, the maker of Camel cigarettes, for running an ad in Rolling Stone this month that violates the terms of its 1998 agreement to stop marketing cigarettes to children. (The ad uses cartoons, something explicitly banned in the agreement.)

In return, corporate America has accused the attorneys general of abusing their power, usurping the role of state legislatures and Congress, and getting in bed with the plaintiffs' bar. The nation's biggest companies have been working on a new backlash. In late October, the U.S. Chamber of Commerce's Institute for Legal Reform (ILR) held its annual summit, and this year's program featured a special panel on reining in state attorneys general. The ILR rolled out what it called a state attorney general "code of conduct" that, if implemented, would prevent state attorneys general from bringing many of the successful suits they've initiated over the past several years. For instance, it would ban attorneys general from hiring outside lawyers on a contingency-fee basis.

Contingency fee arrangements have allowed the attorneys general to vastly expand their resources by hiring lawyers who get paid a percentage of anything they win in court, but who also get nothing if they lose. Big businesses believe that trial lawyers have inappropriately duped attorneys general into hiring them to bring potentially lucrative cases that the states would otherwise never initiate. They think the lawyers should get paid by the hour so their contracts would require legislative approval.

The code would also require attorneys general to return any lawsuit-settlement money to the general fund or other state agencies rather than invest it in further investigations or consumer-protection initiatives. Such a move would, for instance, wipe out West Virginia's anti-trust enforcement division, which is funded entirely with winnings from lawsuits. The ILR’s model code of conduct is based on a survey the Chamber conducted earlier this year on attorney general practices. Most of the attorneys general refused to participate in the survey, and probably rightly so, given that it's likely to end up being used against them in elections rather than to genuinely improve the quality of state representation.

Bob Cooper, a spokesman for Idaho attorney general Lawrence Wasden, who is the president of the National Association of Attorneys General, says that when the ILR sent out the survey, his boss called up the Chamber and said that if they had a problem with the way attorneys general were doing business, they should come out to Boise to talk to him. They never did, says Cooper. "Companies that follow the law don't have a problem [with attorneys general]," he says.

Nonetheless, with financing from many of the drug and insurance companies that have been the target of state investigations and enforcement actions, the Chamber and the ILR have made state attorneys general a major target of their lobbying and political campaigns. Along with the American Tort Reform Association and the American Legislative Exchange Council (both heavily funded by the tobacco industry), the ILR has pushed legislation in the states to prevent them from hiring trial lawyers. So far, only seven states have passed the Chamber's legislation, but it has had better luck in state election campaigns, in part because it has often employed illegal campaign tactics against candidates it’s seen as anti-business.

For instance, in 2004, the Chamber went after Democrat Deborah Senn, the former Washington state insurance commissioner who was running for attorney general. Using a dormant nonprofit called the Voter Education Committee, the ILR secretly dumped several million dollars into issue advocacy ads in Washington bashing Senn, who was comfortably ahead in the polls. Oddly enough, the ads accused her of being in the pocket of some of the very insurance companies that were funding the ads; polling data suggested that this would turn voters against her. The characterization wasn't true: Senn was a Naderite with a strong history of consumer protection. Nonetheless, she lost the election. The state's Supreme Court later ruled that the Chamber's ads were illegal because they failed to disclose who paid for them. "They spent $4 million in a race that should have been $750,000, at most," says Senn. "It was a devastating loss."

While, of late, the Chamber has been leading the charge against the attorneys general, it is by no means alone. In January, the Competitive Enterprise Institute issued a "study" on the nation's "Top Ten Worst State Attorneys General." CEI has been heavily funded by tobacco, auto, and utility companies and has been active in fighting off attempts to mitigate global warming.

Public enemy No. 1 for CEI is Connecticut attorney general Richard Blumenthal, a long-serving attorney who was involved in the state's litigation against tobacco companies in the 1990s. More recently, Blumenthal joined with several other states in using a novel legal theory to bring a public nuisance lawsuit against out-of-state utility companies, alleging that they were contributing to global warming due to emissions of carbon dioxide in violation of Connecticut state law.

Also on CEI's list is Rhode Island attorney general Patrick Lynch, whose office won a multibillion-dollar jury verdict in Providence in 2006 against three paint companies that once manufactured lead paint. The verdict requires the companies to remove lead paint from more than 300,000 homes in Rhode Island. The lawsuit, which was initiated by Lynch's predecessor, Sheldon Whitehouse, now a U.S. senator, was brought by a private law firm contracted with the attorney general's office on a contingency-fee basis.

It's this use of private attorneys that really has the business community up in arms. Attorneys general have increasingly used plaintiffs' lawyers to help them bring complex lawsuits ever since the tobacco litigation in the 1990s. Those suits netted plaintiffs' lawyers billions of dollars and have allowed them to represent the states in risky and expensive lawsuits against some of the nation’s biggest industries, such as gun manufacturers.

Some of these lawyers not only have substantial capital to invest in the litigation, but they are extremely talented. So when they work in tandem with state attorneys general, the state’s bargaining power in court is greatly enhanced. For instance, Motley Rice, the South Carolina-based law firm that handled Rhode Island's lead-paint litigation, was deeply involved in the 1990s tobacco litigation and also has been pursuing private lead-paint cases nationwide.

The Chamber and other critics, though, rightly criticize some of these arrangements as a little too cozy. Most of the contingency-fee arrangements aren't subject to competitive bidding, and because trial lawyers are a reliable source of campaign funding for Democratic candidates, they've created at least the appearance of, and occasionally real, conflicts of interest for some state attorneys general.

For instance, last month State Farm sued Mississippi attorney general Jim Hood, accusing him of using a criminal investigation into the company's handling of Katrina-related insurance claims to force the company to settle private lawsuits brought by trial lawyer Richard "Dickie" Scruggs, potentially netting Scruggs millions of dollars in fees. Scruggs, who was indicted last month for allegedly trying to bribe a judge in a lawsuit over legal fees in those Katrina cases, donated $33,000 to Hood's reelection campaign in a single quarter this summer. Likewise, Motley Rice has been a big contributor to Rhode Island's attorney general, Patrick Lynch.

But the attorneys general say that the concerns over conflicts of interest are just a smokescreen that business is using to mask its real agenda, which is to gut state enforcement efforts. Another one of the business groups' top ten worst is West Virginia attorney general Darrell McGraw. In 2004, using outside lawyers, McGraw settled a lawsuit against Purdue Pharma that alleged that the company inappropriately marketed the painkiller OxyContin to state residents, many of whom ended up addicted to it. As part of the settlement, the company agreed to pay $10 million that would go into state drug-treatment programs, among other things. The Chamber has heavily criticized McGraw for using outside lawyers for the case.

But Fran Hughes, the chief deputy attorney general in West Virginia, says that her office would never have been able to bring the lawsuit without outside help, especially given that there was no guarantee they'd win. Hughes says her office racked up $465,000 in legal expenses during the litigation. "Do you think the legislature is going to give us that and say, 'See what you can do'?" She says that under the state's arrangement with the outside lawyers, the attorney general retains control of the case, all the documents are available under the state Freedom of Information Act, and taxpayers end up better off because the legal fees "are paid by the companies that break the law." As for business groups that want to ban her office from hiring contingency-fee lawyers, she says, they "just want to stop attorneys general from enforcing consumer laws."