The state comptroller of New York, Alan Hevesi, had a letter to the editor published in Friday’s Wall Street Journal attempting to defend the exorbitant legal fees he has agreed to pay his major campaign contributors for suing Wall Street stock and bond underwriters. We’re glad to see the comptroller willing to engage in a debate on the issue, but it’s disappointing to see him do it in such a thoroughly misguided and misleading way.

Some of Mr. Hevesi’s responses are breathtaking. He brags, “I have drastically reduced class action lawyers’ fees … In the Cendant case, as New York City comptroller, I worked with our corporation counsel to reduce fees to these same law firms from $262 million to $55 million.” Well, if the Cendant case fees were too high at $262 million, how can Mr. Hevesi defend the legal fees for the trial lawyers in the WorldCom underwriters case, which are $330 million? The trick is, Mr. Hevesi never mentions the $330 million fee in his Journal letter, describing it only as “5.5%.” It still strikes us as hefty compensation for two relatively small law firms for a relatively short-lived case, the bulk of which was settled before trial.

Mr. Hevesi claims that “In the WorldCom case, my predecessor selected the firms, I did not.” He neglected to disclose to the Wall Street Journal’s readers that the retainer agreement declaring the $330 million legal fee as “presumptively fair, adequate and reasonable” was signed by an aide to Mr. Hevesi, Alan Lebowitz, on July 30, 2003. Mr. Hevesi, who was elected in 2002, had been in office for more than six months at that point.

Mr. Hevesi claims “the professional staff who make decisions about selecting firms and about fees have no knowledge about who did or did not contribute to anyone’s political campaign. In fact, they recently selected a firm to represent us against Merck that did not contribute to my campaign, but made substantial contributions to my opponents in both the primary and general election.” Actually, the New York State comptroller’s office didn’t recently select “a firm” to represent it against Merck, it selected two firms. One of them was Abby Gardy LLP. Individuals associated with that firm sank a total of at least $115,500 into Mr. Hevesi’s campaign in 2002. When The New York Sun called Arthur Abbey, a partner at Abbey Gardy who wrote a $44,000 check to Mr. Hevesi’s campaign in March of 2002, and asked how his firm was chosen to represent Mr. Hevesi in the Merck case, Mr. Abbey told us, “I can’t tell you … It’s like how you come to get a gift. It was his decision.”

Information about these political contributions is available in The New York Sun, in the Wall Street Journal, in Forbes magazine, and on Web-based state campaign finance databases. If Mr. Hevesi’s aides “have no knowledge” of them, they are leading an oddly sheltered existence. In any event, Mr. Hevesi himself is clearly aware of him – he attended a fundraiser in the Philadelphia headquarters of one of the law firms. And Mr. Hevesi is the ultimate authority over hiring lawyers and setting the fees.

Mr. Hevesi claims with respect to the investment banks that have agreed to $6 billion in settlements: “It is not clear that there were even short term losses in the stocks of most of the defendant underwriters.” From where does he think the $6 billion came? On the day that Citigroup announced its $2.575 billion settlement, Citigroup’s stock price plunged significantly enough that the stake held by the New York State Common Retirement Fund alone lost an estimated $28 million in market value.

In his letter to the Journal, Mr. Hevesi also writes, “By putting a price on participating in a fraud, we encourage underwriters and accountants to substantially strengthen their diligence.” Well, which is it? Mr. Hevesi wants to claim the underwriters “paid a price,” but he also wants to claim that they didn’t suffer even short term losses in their stock prices. It’s hard to have that one both ways.

An article by Neil Weinberg in the April 24 issue of Forbes says that the New York State Common Retirement Fund – the pension fund whose holdings allow Mr. Hevesi to get lead plaintiff status in these class actions – will only see about $11 million of this settlement. Yet the fund owns so much stock in the investment banks it is suing that it will end up paying about $13 million in the settlement.

Mr. Hevesi claims the risk of class action lawsuits will reduce scandals and “save all investors billions of dollars.” But there’s no empirical data we are aware of that links the expansion of class-action lawsuits with reduction in scandals. These lawsuits can cost investors billions of dollars, because instead of spending and investing in innovation and risk-taking, companies are busy dealing with lawyers and insurance policies. The big banks may be less willing, in these circumstances, to help businesses find the capital they need to finance growth. And more and more deals may wind up in the private equity realm, available only to rich investors.

As public companies take fewer risks for fear of lawsuits, the returns could well ebb, costing investors billions of dollars. After all, the reason corporate stocks and bonds pay a higher return than government-guaranteed investments like T-bills or savings accounts is the risk premium. If government, in the form of Mr. Hevesi and those like him, is going to step in and sue for recovery every time a company sinks, the risk is going to be gone – and the premium may well vanish with it.

Mr. Hevesi says his lawsuits are about “rebuilding confidence in the underlying values of our economic and political institutions.” It seems to us they are doing more to erode those values than to rebuild them. If Mr. Hevesi wanted to rebuild some confidence, he could leave securities law enforcement to the professionals at the Securities and Exchange Commission and the Justice Department, and he could stop accepting the hundreds of thousands of dollars in campaign contributions from those he stands to award hundreds of millions of dollars in legal fees.