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

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.

"I always felt that if he felt the firms had actually broken the law in terms of investor research, he should have prosecuted them either as individuals or as firms," the Wall Street Journal editorial-page editor Paul Gigot, who has occasionally excoriated Spitzer in his columns, told me. "Let a jury decide. I always thought it was strange that he stopped short of prosecution in actual instances. He got the maximum amount of publicity out of … settling for some kind of agreement that is less than revolutionary or remarkable." In other words, Gigot said, Spitzer got prosecution-level publicity without actually having to prosecute. "I would argue the Enron prosecutions are going to have a greater impact on corporate behavior than any of the Eliot Spitzer settlements, because you have the lesson of people going to jail. In stock-market research, nobody's going to jail."

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Sridhar Pappu is an Atlantic correspondent.

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