The Crusader

Eliot Spitzer, the attorney general of New York, has risen to national prominence by emulating Teddy Roosevelt and fearlessly taking on powerful interests. His aggressiveness has made him a lot of enemies—but it may propel him to the governor's mansion and beyond

After he won his battle with Vacco, Spitzer didn't wait long to pick another. In 1999 and 2000, his first two years in office, he led coalitions of northeastern states in suits against midwestern utilities whose pollution had drifted into their air. He has continued to attract attention with the battles he's picked. When the Bush Administration's Environmental Protection Agency tried to roll back the standards set by the Clean Air Act, Spitzer led a group of states to halt it. Most recently, when it was revealed that GlaxoSmithKline, maker of the antidepressant Paxil, had hidden studies showing an increased risk of suicidal thoughts in teenagers when they began using the drug, Spitzer sued, saying the company had not used fair disclosure when recommending the drug to doctors.

In answer to those who say Spitzer is interested only in creating a national name for himself, his supporters point to the fights he has picked locally, in New York. He took action against Manhattan's Gristede's grocery store—successfully demanding back pay and more than minimum wage for its deliverymen. He represented eighteen day laborers in a suit against a contractor in Southhampton, and he brokered an agreement with many of New York City's Korean grocers to raise the wages of their largely Mexican work force from around $3.50 an hour to minimum wage. ("He tries to speak Spanish," says Arturo Sarukahn, Mexico's consul general in New York. "He needs practice, but he's not bad. He's articulate enough to make these day laborers, who are mostly undocumented and who are afraid, feel comfortable.")

For his part, Spitzer says he is not some rogue force, picking fights willy-nilly: rather, he is merely following the model of another New York public official, whose portrait is prominent on his office wall. "I don't have Teddy Roosevelt's picture up there because I have any illusions of grandeur," he says. "It's because I believe he's the one that came closest to getting it—that the market needs those boundaries."

"The three areas where we have been most active, quite frankly, are where he was most active," Spitzer continues. "Trust-busting is analogous to what we've done on Wall Street. He was the first one who understood that preserving our environment and passing it on to the next generation was something we should do. And he believed in protecting labor—not because he said we have a right to a particular wage at X dollars an hour, but preserving labor in the sense of holding businesses to a certain minimum threshold, which is why the labor cases are the ones I feel most passionately about."

But the labor cases are not what made Spitzer a nationally known figure. Indeed, had it not been for the dizzying financial boom of the 1990s and the hangover that followed, he might have remained merely a well-meaning and eager bureaucrat, grabbing blurbs in the New York tabloids for busting up an auto-dealership fraud or calling out an Albany bank for not hiring Hispanics. But he happened to arrive in the attorney general's office a year and four months before the collapse of the nasdaq, in whose meteoric rise millions of Americans had envisioned early beach-house retirements. In other words, he was lucky.

Boy, was he: all the elements for a rise to prominence on a wave of defrauded investors' fury were in place. Spitzer had an angry public. He had an SEC, directed by Harvey Pitt, that had held back its investigative dogs despite the damage done by Wall Street shenanigans and the declining stock market. And most important, he had the Martin Act—a seldom used 1921 New York statute that gives the state's attorney general grand powers for dealing with the financial markets, the grandest of which is the ability to charge someone with fraud without having to show fraudulent intent.

Invoking the Martin Act, Spitzer went after Wall Street with the hammer of Thor. In May of 2002 his office announced a $100 million settlement with Merrill Lynch that revealed to the public the guts of a flawed—if not corrupt—stock-ranking system. Spitzer publicized e-mails showing that Merrill Lynch analysts had recommended dot-com stocks—with whose companies Merrill's investment-banking arm was doing business—to investors while privately referring to those same stocks as "dogs" or "junk." By the end of 2002 Spitzer had gotten the ten biggest firms on Wall Street to pony up $900 million in fines and agree to structural changes that require firms to buy independent stock research and disclose it to investors, and that bar analysts from helping investment bankers recruit business with the promise of a good stock rating. By the following year Pitt had resigned from the SEC, and William Donaldson, a former diplomat and a former chief executive of the New York Stock Exchange, had taken his place, promising, among other things, to rein in state regulators like Spitzer.

"A lot of what Eliot did was take aim at something [the bogus stock-ranking system] that everyone in the industry thought was corrupt" but about which most people figured, "What the heck, nobody gets hurt," James Cramer, the CNBC talk-show host, told me. "We all knew it was corrupt, but nobody wanted to pull back the covers and reveal it to be corrupt."

"He didn't take any power away from anyone," Cramer continued. The people and institutions that should have been using their power to prevent stock fraud had already abdicated it. "So Eliot came in. When Ronald Reagan came to power, he wanted to give power back to the states. The states got it. And this"—a rampaging state attorney general—"is what it looks like."

Having wielded his power against one part of the financial-services industry, Spitzer took on another: mutual funds. First his office went after Edward Stern and Canary Capital Partners, alleging that they had been allowed by Bank of America and others to illegally buy mutual-fund shares after the close of the market and profit from selling them the following day. It led the way to a joint settlement with the SEC that forced Janus Capital to refund $100 million to investors adversely affected by the illicit preferential treatment the firm had given to "market-timers"—speculators who frequently trade large sums of money in and out of the fund in an attempt to profit on short-term fluctuations in pricing. It forced Richard Strong to resign from his own fund company for selling shares of the mutual funds he oversaw while encouraging his investors to hold on to them. And although the SEC forced Alliance Capital to pay $250 million in restitution for its own market-timing abuses (though Alliance acknowledged no wrongdoing), Spitzer made a separate case that the firm's fees were too high (so high, he said, that the firm was "[enriching itself] at the expense of investors"), and—using his own powers under the Martin Act—compelled the company to reduce them by 20 percent. As a result other fund companies fell in line, slashing their fees before Spitzer's office slashed at them.

Spitzer's strategy for correcting criminal behavior has been unorthodox. In the 1980s, when Rudy Giuliani made a name for himself as a federal prosecutor, he did it by not only landing mob convictions but also arresting and handcuffing high-flying financiers in front of rolling TV cameras. But—aside from a couple of exceptions in the mutual-fund cases—Spitzer got no convictions. There were no trials, no scenes of Spitzer or one of his deputies on Court TV, no tabloid-published courtroom sketches of his defendants inside a federal courthouse. There were only fines and, many have argued, Ike Turneresque promises by the firms that they would change their behavior forever.

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