The faulty premise of the state corporate scandal investigations.

In Salt Lake City, temporary legal workers and law students are trolling through some 100,000 e-mails sent by employees of Goldman Sachs, seeking evidence that its analysts skewed stock recommendations to curry favor with investment bankers and companies. (The researchers may not find evidence of conflicts of interest, but they will surely hit a mother lode of off-color jokes.)

Ever since New York State Attorney General Eliot Spitzer single-handedly wrung a $100 million settlement out of Merrill Lynch in May, his fellow state AGs have been sifting through Wall Street internal communications like forty-niners in search of gold nuggets. California has staked out Deutsche Bank, Massachusetts is digging dirt on Credit Suisse First Boston, and Alabama is looking into Lehman Brothers.

The connections between the states and their Wall Street targets are tenuous. Lehman does trace its origins to a dry-goods store in Montgomery, Ala. But the states really claim jurisdiction because large investment banks all conduct business in every state and because investors in their state were theoretically harmed by the corrupt recommendations these banks' analysts made.

There is some historical precedent for this state activity. In the early 20^th century, securities salesmen traipsedfrom town to town like Harold Hill, promising the investments they sold would grow as high as the sky. And so sensible Progressives (the muscular early 20^th-century kind) passed "Blue Sky" laws, which empowered states to regulate securities and punish hucksters.

Since the creation of the Securities and Exchange Commission in 1934, federal law enforcers have generally taken the lead in securities cases. But with the SEC run by Harvey Pitt, a man not known for his reformist tendencies, the state AGs, who possess both vast ambition and the power to litigate, have stepped into the vacuum. What better way to get free media exposure, and hence set the stage for a gubernatorial run, than by crusading against an ill-reputed industry? Even now, the Spitzer 2006 buttons are likely being printed. (In 1998, Jacob Weisberg explained why state AGs have suddenly become so litigious.)

Still, the premise of these state cases is troubling. The theory seems to be that by failing to disclose that their recommendations (and compensation packages) were influenced by their firms' investment-banking business, analysts corruptly gulled people into buying stock and then into holding that stock as it crashed.

The problem with the theory is that it confuses analysts' responsibility to clients (enormous) with their responsibility to all the people who watched them on CNN (nonexistent). What fiduciary duty to the residents of Provo, Utah, did Jack Grubman violate when he flogged stocks on CNBC? What commercial relationship between Lehman Brothers and the denizens of Birmingham, Ala., was compromised when a Lehman analyst told a Dow Jones reporter that she had upgraded a stock to a strong buy?

The vast majority of the people who consumed these recommendations—on television, through the Internet, in newspapers, at the water cooler—and then acted upon them weren't clients of the investment banks.

When most people buy stocks traded on the New York Stock Exchange, they buy them from other investors. Specialists on the floor of the NYSE stand there all day and match up buyers and sellers. The person who sold you those 200 shares of Enron at $80 could have been a mutual-fund company like Janus or your neighbor. When you sold AOL at $50 just before it plunged, you made a few bucks off your buyer's misjudgment.

Now, if you were a Merrill account holder, and your Merrill broker, acting on Merrill analyst Henry Blodget's suggestion, strongly suggested that you buy a stock of one of Merrill's investment-banking clients, and thus induced you to conduct a revenue-generating transaction with Merrill, that would be plainly actionable. Indeed, last year Merrill paid $400,000 to a brokerage client who lost bucket-loads of cash after taking Blodget's advice to buy InfoSpace, a Merrill investment-banking client. Even as the stock tanked, the Merrill broker urged the client not to sell, citing Blodget's positive recommendation. Investors and lawyers have filed several arbitration claims or lawsuits involving similar situations.