Conflicts of interest in the Schneiderman stunt suit?

Much thanks to FT Alphaville for highlighting my story about Eric Schneiderman’s lawsuit against JPMorgan Chase over Bear Stearns’ dodgy mortgage-backed securities deals.

I wrestled in that other piece about whether there was a legitimate conflict of interest argument with Sanchez. Could JPMorgan Chase try to invalidate the lawsuit by saying that Sanchez’ involvement represented her trying to bring the private actions of investors and bond insurers forward? To be sure, private litigants have already said that the case “validates their claims,” so they have some stake in its success.

Looking further at this, I discovered that the New York State Public Officers Law is fairly stringent when it comes to ethics. The law governs all political appointees, including those in the agencies of constitutional officers, like the Attorney General’s office. Section 74, the code of ethics, lays out the responsibilities of public officials with respect to conflict of interest:

No officer or employee of a state agency, member of the legislature or legislative employee should have any interest, financial or otherwise, direct or indirect, or engage in any business or transaction or professional activity or incur any obligation of any nature, which is in substantial conflict with the proper discharge of his duties in the public interest.

“Financial or otherwise, direct or indirect” certainly emcompasses a lot of territory. The Ambac suit and the Schneiderman case move in the same direction, so there isn’t necessarily a conflict of interest here. But it’s the appearance of impropriety, the idea that prosecutorial discretion may have been used in a way to enrich the former law firm of the deputy AG, that could draw in Sanchez.

Building off my reporting, the Financial Times actually asked Schneiderman’s office about this:

The lawsuit borrows large swathes of a previous suit filed against JPMorgan by Ambac, the bond insurer. Karla Sanchez, who represented Ambac on the Bear Stearns case, went to work for Mr Schneiderman in January 2011 when she was appointed executive deputy attorney-general for economic justice. Ms Sanchez has been recused from working on the JPMorgan mortgage case, a person familiar with the matter said.

So there’s an off-the-record assurance that Sanchez has been recused. Clearly, you wouldn’t bring up recusal if there was no problem between her work on the Ambac case and working on the NY AG suit.

Originally, I heard from sources there was a recusal and a change to an “un-recusal” with respect to Sanchez. The only way we will know for sure is if there’s a paper trail inside Schneiderman’s office with respect to these recusals. Any AG office with a turnover in personnel will feature attorneys who worked in private practice on cases that may come up in the course of business. It depends on how Schneiderman’s office handles that. So stay tuned.

As I’ve said, there’s nothing wrong with building off the work of others, and the Martin Act has both a lower standard of proof and more investigative ability than private litigation, as well as they ability to sue for the broad range of conduct rather than just the interest of one individual party like a bond insurer. But it’s the timing and scope I object to here. This case could have been filed years ago (the alibi that “it takes time to review documents and take testimony” is so bogus, most of the documents and testimony in this suit are pulled from other cases). And the delay means that a fraction of the conduct gets pulled into the case, because of the statute of limitations. Some more promising avenues of inquiry were not taken up. And apparently you can have widespread securities fraud without individual fraudsters, as nobody was named in the suit and it includes no criminal charges.

That, plus this potential time bomb with Karla Sanchez, should worry people about the intent here and the potential for accountability.