Going once, going twice.

In an investigation that could lead to criminal charges, New York State Attorney General Andrew Cuomo has issued subpoenas to 18 banks – including Citigroup, Merrill Lynch, Morgan Stanley, and JPMorgan Chase – that underwrote and brokered investments in the now-collapsed auction-rate securities market. The AG is seeking information dating back to 2003 on the extent to which the banks artifically supported the market and how they disclosed the risks of auction failures to investors.

Auction-rate securities are long-term bonds that were often marketed as short-term investments because buyers could sell them at periodic auctions. For two decades, securities dealers had routinely bought unwanted bonds at auction to prevent failure. The $330-billion market collapsed in February, when dealers suddenly stopped bidding in an effort to conserve capital in light of the subprime mortgage crisis.

The investigation was reportedly instigated when more than fifty lenders had to stop making federally guaranteed student loans. Now nine other state attorneys general have formed a task force to investigate whether brokers misrepresented ARSs as an alternative to money-market investments when they sold them to individuals.

The subpoenas were issued under New York’s Martin Act, a sweeping and broad statutory scheme dating to 1921 that criminalizes misrepresentation in connection with the purchase and sale of securities. The Act has been used regularly by both the New York County DA’s office and former AG Elliot Spitzer to police securities trading on Wall Street. Now it is being used yet again, and institutions and individuals face tremendous potential criminal liability. Intense and powerful market forces provide explanation, mitigation, and defenses for those ensnared in the AG’s latest effort to blame someone – anyone – for the sorry state of our economy. CR