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Cuomo Seeks to Expand Grip to Fight Fraud

When Andrew M. Cuomo was sworn in as New York’s chief executive six weeks ago, he took control of a multibillion-dollar budget, tens of thousands of state workers and hundreds of agencies.

Andrew Cuomo (D)
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Andrew Cuomo (D)

But Mr. Cuomo appears to want to hang on to his old job, too.

Buried in the governor’s new budget are provisions that would grant the executive branch sweeping new powers to investigate Wall Street banks, hedge funds and insurance companies, alarming some industry officials and raising the prospect of a major clash with his successor as attorney general, Eric T. Schneiderman, and local prosecutors over high-profile securities and investment cases.

The provisions accompany Mr. Cuomo’s proposed merger of the state’s Insurance and Banking Departments, along with the Consumer Protection Board, into a new Department of Financial Regulation.

Mr. Cuomo has argued that those changes are necessary to create a more efficient and modern regulatory framework for businesses and better protection for consumers.

But the budget language would also empower the new agency to issue subpoenas, compel testimony and seek damages and penalties from anyone committing “financial fraud,” a term defined broadly to encompass investments, securities and derivatives marketed and sold by Wall Street investment houses, as well as financial services, life insurance and more.

Mr. Cuomo’s proposal would also grant the agency authority to investigate any violation of the Martin Act, the 90-year-old statute that gives the New York attorney general the broadest legal powers of any regulator in the nation and which was employed aggressively by Mr. Cuomo and his predecessor, Eliot Spitzer, to prosecute Wall Street firms.

The plan startled some in the financial community, and the administration appears to be quickly revising the language to head off potential opposition.

Mr. Cuomo’s communications director, Richard Bamberger, said the governor agreed to remove the Martin Act provisions after business groups raised concerns earlier this month, and alerted Mr. Schneiderman that they would do so.

Mr. Bamberger said the provisions had been inserted by mistake and would be struck from the amended proposal Mr. Cuomo will submit in early March.

Yet even absent those provisions, Mr. Cuomo’s proposal is fairly sweeping — intentionally so, his aides said.

In an era of global finance, they said, a single regulator with broad jurisdiction would be more effective than the patchwork of agencies charged with protecting New Yorkers from financial fraud.

The new agency would also be empowered to oversee types of firms that are now relatively lightly regulated, including hedge funds.

“It is indisputable that New York has an ineffective and outdated regulatory structure that failed to protect millions of innocent consumers and contributed to a worldwide financial collapse,” Mr. Bamberger said in a statement.

“It is amazing that some can still argue that Wall Street doesn’t need better regulation after greed and corruption almost caused another Great Depression.”

Some experts said the new agency’s powers would in many ways exceed those of the attorney general. The new agency could impose fines and even seek restitution for an almost unlimited array of financial frauds — all through administrative hearings, without going to court.

“The bill provides the governor with significantly expanded administrative authority, including restitution and higher fines, that would make the new agency powerful even beyond the ability to take companies to court,” Mark Peters, a former state insurance official who now represents clients in private practice at Edwards Angell Palmer & Dodge, said in an e-mail.

Legislative leaders have yet to weigh in on the language, which requires approval from lawmakers. Critics call it an unwarranted expansion of executive branch authority.

“Even Eliot Spitzer didn’t have the audacity to make the sort of power grab that Governor Cuomo is proposing here,” said Darren McKinney, a spokesman for the American Tort Reform Association, a business-backed group that advocates for limits on lawsuits and liability for business.

An executive at a large hedge fund, who demanded anonymity because he feared retribution should the merger occur, said: “This is a real shock. It raises very serious issues about the appropriate governance structure of financial regulation in New York.”

Under Mr. Cuomo’s proposal, jurisdiction in criminal cases would remain with the attorney general and local district attorneys.

But the proposal appears to allow the new agency to investigate more than a dozen types of criminal violations, like larceny, forgery, bribery and even racketeering, if those crimes involve a financial product or service or people who sell them.

The new department could also compel witnesses to testify in exchange for immunity. While Cuomo aides argued that such powers were not new to New York banking and insurance regulators, some experts said the bill raised the risk of administrative investigations interfering with criminal cases.

“The concern would be that a state agency could confer immunity on someone that a district attorney is investigating without the district attorney’s knowledge,” said Paul Shechtman, a former federal and state prosecutor who is now a defense lawyer.

Experts said Mr. Cuomo’s proposal would transform the existing Insurance and Banking Departments from traditional regulatory agencies focused largely on compliance and rule-making into an unprecedented amalgam of regulator, prosecutor and judge.

It could have the effect of transforming the superintendent of the new agency into a second “sheriff of Wall Street,” forcing Mr. Schneiderman, a fellow Democrat with whom Mr. Cuomo has clashed in the past, to compete for high-profile cases.

Danny Kanner, a spokesman for Mr. Schneiderman, declined to comment on the powers envisioned in the legislation.

But in a statement, Mr. Kanner said, “The attorney general supports the concept of merging these departments for the purpose of consolidation, and looks forward to continued discussions with the governor’s office on other details of the proposal, as well as other reforms to state government.”

The legislation does not formally strip any powers from the attorney general. But while Mr. Cuomo has described the merger in part as a way to save money, his executive budget anticipates that the operations of the new agency would cost about $6 million more than its three predecessors in its first year of operation.

(Aides said that merger had since been “rescored,” in budget parlance, and was now expected to result in year-to-year savings.) At the same time, Mr. Cuomo’s budget reduces the budget of the office of the attorney general by roughly 10 percent.

Historically, the attorney general and the Banking and Insurance Departments have shared a creative tension.

The agencies focused on day-to-day compliance, while the attorney general’s prosecutors, under Mr. Spitzer and Mr. Cuomo, opened up large-scale cases — often against powerful firms and interests — with an eye toward tackling systemic problems, whether those were corruption among research analysts or conflicts of interest in the student loan industry.

Louise Story contributed reporting.

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