Tuesday, May 13, 2008
Does New York Attorney General Eliot Spitzer really want to clean up the stock market, or just make himself look good?
Oct 10, 2002 | Eliot Spitzer spent two years working on mergers and acquisitions for a white-shoe corporate law firm. He borrowed millions of dollars from J.P. Morgan to finance his successful 1998 campaign to be New York's attorney general. He lives in a Fifth Avenue apartment worthy of Gordon Gekko. He's even claimed that all his friends are either investment bankers or the lawyers who represent them.
But these gilded connections haven't kept the born-and-bred New Yorker from ripping into the nation's financial giants like an armor-piercing bullet. While Congress and the SEC's Harvey Pitt dither in the face of widespread corporate malfeasance, Spitzer is a busy man. You could call him the nation's toughest corporate cop. He's certainly the most feared man on Wall Street.
Spitzer's crusade first attracted public attention in April, when the Princeton- and Harvard-educated prosecutor announced that his investigation into analysts' stock-buying recommendations had turned up a smoking gun. E-mails from within the investment banking firm Merrill Lynch proved that analysts privately slammed stocks that they were publicly praising. Their behavior reflected a classic conflict of interest. Merrill Lynch was afraid to antagonize clients who were filling its coffers with millions of dollars of investment banking fees.
Merrill Lynch never admitted guilt, but in May the firm settled for $100 million and agreed to change the way its analysts did business. Other firms soon followed suit. The attorney general's office continues to pursue several investment houses for additional conflict-of-interest violations, and on Sept. 30 Spitzer upped the ante. His office sued the former top officials of five telecommunications companies, arguing that they gave investment banking business to Citigroup in exchange for shares of hot IPO companies, which they would then "spin," or sell immediately, for windfall profits.
Will Spitzer's high-profile crusade result in long-term change? Some critics argue that Spitzer, rumored to be angling for the 2006 New York governor's race, cares more for publicity than anything else. No Chinese wall separating research from investment banking has been established as a result of Spitzer's actions, and Merrill's seemingly large settlement amounts to but a fraction of its annual revenue.
Spitzer has also given up his lone-wolf ways, agreeing on Oct. 3 to work with the Securities and Exchange Commission and the National Association of Securities Dealers on a "swift and appropriate resolution" to Wall Street's ethical lapses. But is working hand-in-hand with Harvey Pitt's industry-friendly SEC the best way to wage war on Wall Street?
Salon asked Spitzer about reforming Wall Street, his role and his office's plans for the future.
You've recently launched a series of lawsuits that aim at the practice of giving hot IPO shares to CEOs. How do these cases fit into your previous focus on bogus recommendations by analysts?
The issues are interrelated to the extent that part of the larger structure there had to do with analysts pumping stocks for investment banking business coming in, and as part of the structure, the CEOs of the companies that brought the business in did indeed receive the hot stock allocations.
Until recently, you were working alone. Why did you decide to join forces with the SEC and other federal regulators?
I don't think anybody would dispute that it is better policy if we can all work together, whether it be the stock exchange, the NASD, my office or the SEC. I think we all understand that there is an obligation to try to bring some uniformity and regularity of practice to this area. So whatever substantive disagreements there may be, we have to make a serious effort to work those through and come up with a common set of standards.
But you've complained about the [SEC's] lack of action in the past. Are you convinced that they've turned over a new leaf?
First, I think they're acting, at this point, aggressively. I'm not going to get into the business of taking back anything I said before; I wouldn't do that. I think those were appropriate comments at the time. But I think there are also different phases in this process. The first phase was to frame the problems through investigations, demonstrate the magnitude of the problem. Then there comes a moment when you have to try to resolve it; and trying to resolve this issue can't be done unilaterally, while making cases can be ... The natural evolution of this was that there was going to be a moment when the parties had to come together.
The $100 million settlement with Merrill has struck some critics as a great deal for Merrill, particularly in light of their proximity to Enron. Why did you settle instead of pursuing the case and maybe putting some people in jail?
Everything in due course. We're now looking at the Merrill settlement from the vantage point of October. On April 8, when I raised the issues on Merrill and provided the proof, everyone said, that can't be true, that's wild. The point of the Merrill settlement was to begin the process of structural change. The $100 million in your statement is correct. It's objectively a large sum of money, but it's not a large sum of money to Merrill. But the structural change that we initiated with Merrill was the important point. Breaking the logjam in the debate about the relationship between analysts and investment bankers was more important than exacting an extra pound of flesh.
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