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States Flex Prosecutorial Muscle

That prospect worries federal prosecutors and regulators who complain that the state initiatives sometimes complicate their efforts to punish lawbreakers and set workable national standards. "There is a legitimate role for state regulation of business in our federal system of government. However, a proliferation of conflicting state rules can create inefficiency and inflexibility in our national economy," said John D. Graham, head of the Office of Management and Budget's Office of Information and Regulatory Affairs.

Business groups argue that they are being hit with conflicting demands from ambitious politicians more interested in making headlines than consistent, viable policy.

"The overreaching of the state attorneys general is a problem that is growing," said Lisa Rickard, head of the U.S. Chamber of Commerce's Institute for Legal Reform, which sponsored a study last fall of class-action suits brought by attorneys general and may mount challenges to state actions it considers inappropriate. "They're trying to legislate and they are trying to regulate through litigation."

Activism is not limited to state attorneys general. State treasurers and the heads of state pension funds have been pushing big companies for corporate reforms. Although key environmental and banking cases are still pending, so far the states are doing well. Many corporate targets have settled and agreed to changes, and a federal judge ruled preliminarily for the states in one landmark clean air case.

"We are right on the facts. This isn't new regulation. It's enforcement of existing statutes," Spitzer said. Conservatives "pushed for federalism to begin with," he said. "They were trying to limit federal enforcement. They are now paying for the Frankenstein they created."

Spitzer recently predicted that he will need to bring fewer cases against Wall Street because the federal regulator, the Securities and Exchange Commission, has become more aggressive in the wake of his earlier probes.

Historians and policy analysts say the current activism was decades in the making. "Regulatory competition is as old as the Constitution," said Eugene A. Ludwig, who clashed and cooperated with state banking regulators as comptroller of the currency in the 1990s. "It's inherent in our form of government," which gives federal and state officials overlapping responsibilities.

In the 1970s, federal officials, acknowledging they couldn't do everything, gave grants to states to beef up consumer and investor protection. The flow of cash dried up after Ronald Reagan was elected president, but the bench strength built up in state legal offices didn't wither and die. Instead, states began cooperating and finding new targets. In 1984, six states in the Northeast sued to force Reagan's EPA to order pollution cuts, and 21 states teamed up to challenge a proposed settlement in a federal class-action securities fraud case in 1985.

Reagan and his successor, George H.W. Bush, also appointed judges who supported states' rights, arguing that Congress and federal regulators had overstepped their authority. Some of those same judges are now hearing the current crop of state lawsuits.

When Bill Clinton was elected president, his administration began bringing more federal environmental and antitrust actions. Most state attorneys general backed off or coordinated their actions with the federal government.

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