Emboldened by New York State Attorney General Eliot Spitzers landmark settlement with Merrill Lynch, securities officials and attorneys general from numerous states are investigating at least a dozen other financial firms for allowing conflicts of interest to distort their investment advice.
These officials have set up a task force through their national organization, the North American Securities Administrators Association, to coordinate investigations with each other and with the U.S. Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange.
"States have banded together to marshal resources to get it all done," said Joe Borg, Alabama Securities Commissioner and president of NASAA. "There's a NASAA project group steering all twelve to fifteen investigations."
Borg's office in Alabama is leading the investigation into Lehman Brothers, with Georgia, Mississippi and Indiana providing support. Borg refused to say whether state officials would soon issue indictments or lawsuits against any of the firms under investigation.
"We can't say until we find the evidence there. To presume what we're going to find, we just can't do that," he said.
State officials are concentrating their enforcement efforts on major investment banks and brokerage houses. They are not running large-scale investigations into Enron, WorldCom and other major corporations suspected of fraud.
"By and large those matters are being investigated by the federal regulators, the SEC, the NYSE. The main role of the states is to provide grass-roots investor protections," said Brad Skolnik, Indiana Securities Commissioner and chief enforcement officer for NASAA.
Investment banks and their brokerage houses are licensed by states, which gives state officials jurisdiction over their operations.
"Wall Street brokerage firms these are licensed at the state level. The activities of analysts certainly affected Main Street investors," said Skolnik.
New York's Spitzer, with his investigation of Merrill Lynch and eventual settlement, led the way.
"He got ahead of the SEC," said John Coffee, professor of securities law at Columbia University. "Usually, [the SEC] takes a leadership role. They were a little slow in this area. It's possible that Mr. Pitt [SEC director] was a little more deregulatory than he was activist in this area."
"Generally speaking, the basic pattern is that state security administrators have focused on activities such as boiler shops, ponzi schemes, beneath the attention of the SEC. Mr. Spitzer has shown that there's tremendous political capital to be made. He could be a candidate for governor in the future. And he did find true smoking guns."
Earlier this year, Spitzer accused Merrill Lynch of allowing its investment banking operations to taint its stock trading advice. In May, Merrill agreed to pay a $100 million penalty and sever links between its stock analysts and investment bankers.
State securities officials say the renewed attention to white collar crime is a welcome and needed change from the lax attention it has received in recent years.
"A piece of the puzzle as to why we are where we are is that white collar crime was treated almost as a victimless crime," said Alabama's Borg. "When was the last time you heard the President or Congress come out and say we need to put businessmen in jail?"
But now that politicians of every stripe are clamoring for tougher penalties and tougher enforcement, state securities officials say they will need more resources to investigate and prosecute these crimes effectively.
"We simply have not devoted sufficient resources to fight white collar crime and financial frauds," said Indiana's Skolnik. "If there's any silver lining in this dark cloud, it's that we now realize how important it is to crack down on white collar crime."
But whether that help will be forthcoming is not clear.
"I don't know," said Skolnik, when asked if he expects lawmakers to better fund state securities regulators. "But I am hopeful."