Inspector Gotcha

These might sound like pages from the 2013 ascension of leftist New York City mayor Bill de Blasio. But, in fact, the script played out three years earlier, when New York’s progressives scored a breakthrough by electing as the state’s attorney general Eric Schneiderman, who had no prosecutorial experience but, as Ben Smith noted in a Politico profile the next year, had “spent his career building an ideological infrastructure for the left.” After edging out Nassau district attorney Kathleen Rice by 34 to 32 percent in a five-candidate primary, the Upper West Side state senator went on to win by 11 points in November against Republican candidate Dan Donovan. Last year, he won reelection against GOP challenger John Cahill, this time by a 13-point margin.

Unlike his predecessors Eliot Spitzer and Andrew Cuomo, Schneiderman is not likely to found a cult of personality or publicly burn with an ambition for higher office. What he does make a show of doing is to remember the people who put him in office—labor advocates, community activists, and the sorts of Upper West Siders for whom progressive ideology is not just an Election Day predilection but a way of life—and help them get what they want. And while Schneiderman has clashed repeatedly with other prominent Democrats, it is a tribute to his staying power that both President Barack Obama and now Governor Andrew Cuomo saw fit to lure him into the tent with concessions and recognition rather than leave him to snipe outside.

Beyond the confines of Washington, D.C., the attorney general of the State of New York is, in some ways, the public official most feared by America’s business community, and for reasons that go beyond the famous tenure of hyperactive AG Eliot Spitzer. (See “Enforcer-in-Chief.”) While New York may now be only the fourth-largest state by population, it remains the nation’s center of finance and marketing. What’s more, unlike any other state’s attorney general, New York’s AG can draw on the uniquely prosecutor-empowering Martin Act of 1921, aimed primarily at financial fraud, the scope of which Nicholas Thompson, now of The New Yorker, summarized in Legal Affairs 11 years ago:

After wielding such extraordinary compulsory process, New York’s AG can then, entirely at his discretion, keep the resulting testimony and documents private or release them in full or in snippets, affording him a ready means of trying cases in the press or assisting private groups that may be fighting against the businesses. As Thompson relates, New York lawmakers armed the office with such extraordinary powers on the understanding that they would be used to keep out fly-by-night operators. That was until Spitzer went back on the unspoken deal and turned the act against established businesses, quickly bringing Merrill Lynch and other leading names of American finance to their knees. His successors have never looked back.

Personnel, as they say, is policy: for his chief of staff, the newly sworn-in attorney general Schneiderman chose not some career legal type but the up-and-coming political director of Unite Here, the hotel union. (His director of advocacy, like his top campaign advisor, had previously worked for the politically formidable Service Employees International Union, or SEIU.) And it doesn’t take long browsing Schneiderman’s official AG website—with its separate divisions for “social justice” and “economic justice”—to know that this is not the attorney general of Tennessee or Idaho. True, some of Schneiderman’s projects—a revamp of charities law, closer monitoring of prescription-drug writing, measures against cell-phone theft—might also interest a more conservative attorney general. Equally prominent, however, have been Schneiderman’s legal efforts directed at the so-called gun-show loophole or his threats of fraud actions against energy firms for allegedly overoptimistic projections of the benefits of upstate gas fracking—though, in that case, Schneiderman was just borrowing a page from his predecessor, Cuomo, who had browbeaten utilities into issuing more climate-change warnings—again, ostensibly, as a matter of investor protection.

For the labor movement, no issue has been dearer in recent years than the cause of low-wage work, the aim being both legislated wage mandates and the organizing of low-paid service workers into unions. Schneiderman has been in the fight all along, pushing hard on “wage theft”—a term that represents a continuum of practices, ranging from bald larceny by dishonest casual-labor jobbers to, say, not paying employees overtime if they once sent a work-related e‑mail from their cell phone after office hours. He has taken a particular interest in harrying fast-food operators, the unions’ biggest and most elusive quarry. Schneiderman is so close with the unions that, when he sought $2 million in extra pay for deliverers from a Papa John’s franchisee, an official with the SEIU’s Fast Food Forward coalition learned about the suit—and wrote up a blurb in praise of it—before the pizza operator had gotten word.

In both New Jersey and New York, so-called price-gouging statutes—disliked by many economists but popular with voters—make it a punishable offense to charge high prices for scarce supplies like fuel or generators during an emergency. In the aftermath of Superstorm Sandy, as the Wall Street Journal noted, New Jersey’s attorney general—who usually keeps a low profile, as he is not elected but appointed by that state’s governor—decided to go after several retail stores that he felt had committed well-defined infractions of the law. Schneiderman, by contrast—and stirring much more press notice—chose to file subpoenas aimed at exposing the identity of nameless middlemen (businesses or individual persons—it wasn’t clear) who had advertised gasoline at high prices on Craigslist, citing a vague legal provision against the charging of “unconscionably excessive” prices. Going after anonymous Craigslist vendors represents a more intrusive kind of enforcement, one that blurs the lines between public and private, between regulated businesses and what might turn out to be homeowners with an extra stock of gasoline in their garage. Schneiderman’s action left a much wider swath of private actors feeling as if they were being watched.

In the ongoing battles over the new “sharing economy” institutions of Uber, Lyft, and AirBnB, the views of many progressives coincide neatly with the interests of well-organized players in the New York economy. Though these services are enormously popular with young and urban consumers, they are anathema to the serious Left (Salon: “Why Uber Must Be Stopped”) while imperiling the interests of taxi-medallion owners, hotel operators (and their unions), and, in some cases, city bus drivers. (While millions of Americans bridle at the notion of government telling them what they can do with their homes or cars, New Yorkers—between rent regulation and alternate-side-of-the-street parking—are used to it.)

Matthew Feeney of Cato, a specialist in sharing-economy issues, notes that urban policymakers face a choice when these services arrive in their cities: they can insist that they conform to every existing regulation that governs their competitors, from inspections to commercial licenses; or they can devise new regulations (or reform old ones) so as to bring the services largely aboveground, with greater likelihood of imposing on them taxes, supervision, and methods of consumer recourse. Schneiderman, he says, “is quite safely in the camp” of the regulatory hawks. In one celebrated episode, he subpoenaed the private identity and personal information of tens of thousands of New Yorkers who had put their units on AirBnB, though the ensuing furor over privacy led to a “clarification” that the attorney general’s goal—for the moment, at least—was only to root out renters of multiple units and those who had gone into renting units as an occupation.

The hard-charging attorney general has sometimes had to back off when his overzealousness runs into inconvenient facts. “Herbal Supplements Filled with Fake Ingredients, Investigators Find,” shrieked a CBS headline this past February, heralding what was supposed to be one of Schneiderman’s biggest enforcement actions—but soon turned into one of his most embarrassing.

The initial news coverage was breathless. “Many pills and capsules sold as herbal ‘supplements’ contain little more than powdered rice and house plants, according to a report released Monday by the office of New York state attorney general Eric Schneiderman,” ran The Atlantic’s report. “An investigation found that nearly four of five herbal supplements do not contain the ingredients listed on labels, and many supplements—tested from among leading store-brand products sold at GNC, Target, Walmart, and Walgreens—contain no plant substance of any kind at all.”

The dietary-supplements business has historically benefited from a congressionally prescribed regime of light federal regulation, and it had already come under suspicion. Extracts of such plants as Saint-John’s‑wort, ginseng, and echinacea were often marketed with doubtful and unproved health claims that minimized the risks of overdose and side effects. Reports had also come in about sloppy manufacturing and mislabeling: a study last year of supplements sold as ginkgo biloba, for example, found that a disturbingly high 16 percent did not appear to contain any of the advertised plant.

But Schneiderman’s February announcement appeared to prove that the problems were worse than anyone had dreamed. His office had commissioned its own private tests of popular supplements from some of the nation’s biggest retailers, and the results were startling: 79 percent had no trace of DNA from the labeled plants. There seemed no other explanation but that the business was dominated by outright fraud. The AG backed up his charges by sending cease-and-desist letters to retailers, and private class-action suits followed within days.

But the fraud turned out to be of a rather different sort. Almost at once, experts in relevant biochemical fields—including some longtime vocal critics of the herbal-supplement industry—began to speak out: Schneiderman’s office had gotten nonsensical results by using an inappropriate test, one that neither the industry nor its regulators use to assay final purity. DNA barcode testing, which searches for a particular snippet of DNA distinctive to a plant, may be fine when checking the authenticity of a sample of unprocessed raw plant material. But dietary supplements are made by extracting the so-called active ingredient, which often means prolonged heating, use of solvents, and filtering that removes or breaks down the DNA. The better the purification methods used to isolate the active ingredient, in fact, the likelier that the original plant’s identifiable DNA will be lost. Harvard Medical School’s Pieter Cohen, a leading critic of supplement marketing, told Forbes that it was “no surprise” that Schneiderman’s tests came out negative: “Even if DNA got in, we’d expect it to be destroyed or denatured.” Meanwhile, GNC, the biggest player in supplements retailing, went back and retested the accused products from its line and found, Schneiderman notwithstanding, that all contained the labeled active ingredient.

As the chorus of scientific criticism grew, Schneiderman’s office responded with bluster, telling one news outlet: “We are confident in our testing procedures. The burden is on the industry to prove that what is on the labels is in the bottles.” Remarkably, however, it declined to disclose the methods that its testing consultant had used.

When the attorney general of a state like New York sues a national company, he virtually always manages to compel a settlement of some sort: the cost in publicity and the legal risk of mounting a long-term legal fight are just too high. But Schneiderman’s settlement with industry leader GNC was not only quick—it came less than two months after he filed the charges—but also turned out, in its fine print, to belie Schneiderman’s inevitable claims of a big consumer victory. Bill Hammond of the Daily News sums it up:

The whole affair inflicted millions of dollars in economic damage on companies that had done nothing wrong, while sending consumers around the country into needless spasms of anger, worry, and outrage. As Hammond writes: “It turns out the one peddling snake oil was Schneiderman himself.”

At the center of the Schneiderman record are the various settlements made between banking and financial institutions and state attorneys general. One of the AG’s biggest publicity hits came early in his tenure, when he derailed an all-but-finished deal between the other 49 attorneys general and large mortgage servicers over “robo-signing” and related practices, saying that it wasn’t punitive enough toward the companies and should be renegotiated. After winning concessions in that battle, he pulled a sequel by barging into a nearly completed settlement between investors’ lawyers and Bank of New York Mellon, bringing new allegations against the bank. (New York State wasn’t even a party to that case; Schneiderman’s office said that it was representing the public interest under what is known as the doctrine of parens patriae, or the state suing on behalf of its citizens.) Many of the lawyers who had negotiated the deals—including, in the robo-signing case, some of Schneiderman’s fellow state AGs—were furious with the late-arriving New Yorker for blowing up the product of months of negotiation. The lawyers felt that, while no settlement was perfect, battling for another year or two in court would delay the intended benefit to underwater homeowners.

But the body of opinion leftward of Senator Elizabeth Warren—what you might call the Occupy or Greek Left—was smitten. In these quarters, after all, certain articles of faith prevail: that criminal business misconduct, not foolishness or error or wrongly stimulative government policy, was the key driver of the financial bubble and subsequent crash of the 2000s; that the losses sustained by ordinary people were not primarily a function of a more general wealth destruction but were siphoned into the coffers of the superrich; and that these crimes had gone essentially unpunished, to the lasting shame of the Obama administration.

Yet the particular legal claims that these settlements address are, at best, distantly related to the Left’s narrative about the ultimate meaning of the bubble and crash. Yes, processors did improperly robo-sign paperwork that they were under obligation to review individually, much as you or I certify with a click that we “have read and agree with” contract boilerplate terms that we have no interest in reading, and much as elected officials auto-sign constituent mail that they consider to hold no surprises. A bank that was intent, for whatever reason, on writing a chancy loan—remember, the critique is that banks were misbehaving purposefully rather than by foolishness—would have done so whether or not it had waited until a human had eyeballed each page. Likewise, if one believes that the bubble immiserated America’s working classes, it’s not clear that the ideal fix is a set of securities suits insisting that returns to investors in securitized mortgages should have been higher, all culminating in remedies meant to funnel more money to investors as a class.

But why carp? Even his critics find it hard to deny that Schneiderman’s willingness to make a nuisance of himself paid off handsomely over the short and medium term. New York and other states got more money from the deals—sometimes a lot more. President Obama, tired of the friction, changed tactics and began paying the New York AG flattering attention, appointing him to head an investigatory panel and featuring him prominently at a State of the Union appearance. Just as the real-estate owner with a blocking position in a site assemblage can insist on terms, so New York could play on its holdout status to extract a high ransom in settlements—at least until the act began to wear thin from repeated use. And Schneiderman’s aggressiveness is hardly confined to the banking settlements—he has eagerly pressed redlining charges (see “ ‘Arbitrary and Capricious,’ ”) and pursued an expansion of insider-trading laws to cover a broader swath of behavior.

Altogether, the banking cases yielded billions to New York’s coffers, some tens of millions of which Schneiderman directed to legal-services programs, housing counselors, and assorted “community-development” nonprofits. These include New York Communities for Change, which shares an office building with the Working Families Party and is closely intertwined in its campaigns. “Mr. Schneiderman and the bank negotiated the terms so that he would be given sole discretion over how to allocate the money,” the New York Times reported of one nine-figure fund. That led to further fights: following a battle with Governor Cuomo, Schneiderman consented to turn over some of the windfall to the state’s general fund.

One legacy, however, was hard feelings with his fellow attorneys general—no small matter, since most big cases these days are multistate actions requiring cooperation and delicate trust among groups of AGs. In a 2013New York magazine profile, Chris Smith relates how, when Schneiderman found out that California attorney general Kamala Harris, an up-and-coming liberal, was unwilling to upset the mortgage deal, he dispatched his union-trained chief of staff to the Golden State to start up a ground game against her to motivate her to switch, even collaborating with Harris’s political rivals to do so. Such tactics are practically unheard of in the clubby world of AGs. Short-term, it worked; Harris got on board.

And long-term? One of the liberal lions of state attorney general enforcement, veteran Iowa AG Tom Miller, was scathing when he spoke to Ben Smith for his Politico profile of Schneiderman. “Can a bipartisan group of public officials form an agreement that furthers the public interest—but that’s not totally one-sided or the other and that has some elements of compromise in it? Or can something like this always or usually be destroyed by the left or the right?” And Miller was contemptuous of Schneiderman’s charge—repeated on the AG’s website even today—that the original deal would have given banks a get-out-of-jail-free card for a wide range of misconduct. It’s “not going to be a broad release,” Miller said. “He’s essentially made that up.”

Politically, it’s hard to argue with Schneiderman’s success. Bill de Blasio is just starting to explore a place on the national stage, but the New York attorney general is already there, with a high-profile job not limited to a city constituency. “An increasingly beloved figure among progressives,” as Sam Stein called him in 2012, Schneiderman has managed to weather his famously testy relationship with Cuomo. When Zephyr Teachout mounted a lively challenge to Cuomo in the Democratic primary, it was Schneiderman (with de Blasio) who went before a Working Families Party assembly to urge activists to stand by the governor.

What’s more, in Schneiderman’s current job, the political advantages of incumbency are usually decisive: sitting AGs rarely lose their bids for reelection (New York’s Dennis Vacco was a rare exception in 1998). Last year, no AG incumbents lost their general election bids, and only one, a Republican in Arizona, lost in a primary. While Republicans in recent years have made considerable inroads into the once-Democratic-denominated AG ranks, they’ve done so almost entirely by capturing open seats. That spells years of likely incumbency ahead, should he want it, for Eric Schneiderman—and for his potential targets, years of unease about becoming his next target.