Dudley Do-Right in the Valley of Death

Eliot Spitzer, New York’s attorney general, loves to tell war stories. like the time he was getting ready to expose a prominent Wall Street investment house, charging that its analysts had knowingly made glowing recommendations about sub-par stocks and persuaded small investors to buy them. A lawyer for the firm warned Spitzer: “Eliot, you should know that we have friends in high places.”

Spitzer, a tall, gangly man with a large, jutting chin, says he scoffed at the threat. “Here’s what I answered,” he told a packed crowd last month at Fordham University School of Law in Manhattan. “Do you remember what Vice President Cheney said to Pat Leahy on the Senate floor? I figured that if he could say it, I could say it, too.”

The crowd that had come to hear Spitzer rail against Wall Street corruption roared with laughter. Minutes later, he told another story, this time about comments he had made to a round table of prominent chief executives in New York. They were agitated by the attorney general’s relentless prosecutions of fraud in the mutual fund and insurance industries, and the executive who introduced him emphasized that 99% of the CEOs in the room were honest.

“I couldn’t resist,” Spitzer says, flashing a mischievous smile. “I said: ‘I agree with you. But I’m only interested in the 1% here who aren’t.’ They didn’t like that.”

Ever since the 45-year-old official first turned his sights on Wall Street corruption--launching a 2001 probe into conflict of interest among stock analysts, and establishing an unusually high national profile--he has been excoriated by Wall Street CEOs and a host of other business leaders. They call him a bully, saying he routinely pressures his targets into quick capitulations and billion-dollar settlements, because companies fear bad publicity and plummeting stock prices far more than a long, drawn-out court battle. Others chafe at Spitzer’s habit of imposing reforms on companies as part of his settlements. They question whether he has the wisdom--or the right--to do so.

Thomas Donohue, president of the U.S. Chamber of Commerce, recently denounced Spitzer as “the judge, jury and executioner” in his investigations of Wall Street business. He suggested that Spitzer’s tactics are “the most egregious and unacceptable form of intimidation we have seen in this country in modern time.”

But it’s a different story on Main Street, where Spitzer is focusing more of his attention these days. As he launches a campaign for governor of New York, the man who has terrorized Wall Street for five years is jumping into a far more complicated political arena. The question in the Empire State is not so much whether he will win--polls show Spitzer to be a runaway front-runner--but whether a gung-ho reformer, a man determined to change the status quo, can make a dent in one of the nation’s most atrophied and dysfunctional state governments.

If the experience of California’s Gov. Arnold Schwarzenegger is any indication, New York’s White Knight will have his work cut out for him. Campaigning as an outsider is one thing; cleaning up the mess is another.

Still, when the Fordham speech was over, with well-wishers encouraging “Go get ‘em, Eliot!” and “Give ‘em hell, baby!”, a large crowd swarmed around him. Spitzer, a stiff and intense speaker, sometimes looks like a cross between Ichabod Crane and Dudley Do-Right. But tonight he looked like a celebrity.

Five years ago, most Americans had no idea who Eliot Spitzer was. Attorneys general occasionally make headlines, but they almost never become household words. Spitzer has broken the mold in a relatively short time; few politicians have been able to capitalize so well on the nation’s financial scandals. For many, Spitzer is the one public official who took on the big shots of global capitalism and stood up for the little guy--ordinary investors--who lost billions in the dot-com bust and other financial scandals of recent years. Nearly half of all Americans have stocks or mutual funds, and to some of them Spitzer is a flat-out hero.

“It’s an honor just to see him in person,” says Nancy Levine, an attorney who hustled from Brooklyn through hectic traffic to hear Spitzer’s address at Fordham. “He’s been a voice for regular people, for those who feel betrayed by Wall Street.”

Like others in the hall, she applauded when Spitzer said he took action because other regulators--such as the Securities and Exchange Commission--failed to do their job. “Yes!” she whispered under her breath, as he vowed to continue his probes.

While some denounce him as a radical, New York’s attorney general says he has no use for populist crusades. He believes government has an important regulatory role to play, ensuring that Wall Street follows the rules and does not cheat investors. One after another, he has taken on some of America’s most powerful financial entities--giants such as Merrill Lynch, Morgan Stanley, Smith Barney, AIG, Marsh & McLennan, to name a few--and won. The box score speaks for itself.

* Spitzer’s 2002 probe of tainted stock analyst reports forced Merrill Lynch to pay a $100-million fine; subsequently nine other firms cut similar deals for a $1.4-billion total settlement. Some well-known stock analysts were forced to resign as internal e-mails showed they were routinely touting stocks they didn’t believe in to curry favor with the companies themselves.

* In the 2004 mutual-fund probe, Spitzer uncovered widespread trading fraud that had the effect of siphoning money from small investors. Firms engaged in late trading, market timing and other practices, giving the $7-trillion mutual fund industry a black eye from which it has yet to recover.

* In his current probe of insurance fraud, Spitzer accused Marsh & McLennan, the nation’s largest insurance broker, of taking kickbacks and rigging fees, thus artificially inflating costs and ultimately enriching insiders. Soon after Spitzer announced his investigation, the firm’s market value plunged $11 billion, and top executives were forced out. A related probe is focusing on AIG and other insurers.

The pattern in all of these cases is that Spitzer rarely goes to trial or seeks jail time for CEOs and other officials. Instead, they lose their jobs, and the companies pay heavy fines and adopt changes that guarantee financial abuses will not take place again. He has achieved all this without putting his findings before a jury.

“Spitzer has been the most successful prosecutor in the modern economic marketplace, especially on issues that matter most to the man in the street,” says William McLucas, former director of enforcement at the Securities and Exchange Commission. “This guy has become extraordinarily popular, for obvious reasons.”

Spitzer was dubbed “The Patron Saint of Small Investors” by the Guardian; Time magazine named him “Crusader of the Year” in 2002; “60 Minutes” anointed him “The Sheriff of Wall Street.” Fortune called him “The Enforcer.” He didn’t win these plaudits by playing nice.

Close friends describe Spitzer as a devoted father and husband who savors free time with his family and didn’t have to take on Wall Street or even seek out public service because he was born to rich parents. He has a dry, self-deprecating sense of humor.

But while Spitzer can be charming and genial in private, others have felt the sting of his temper. He can be caustic with opponents, and belligerent and impatient with those who cross him. And the attorney general doesn’t humbly acknowledge his triumphs in public. He’s like a general touring a battlefield after the war, poking corpses with bayonets. Shortly after the Merrill Lynch revelations, in which the company was embarrassed by the release of internal e-mails, Spitzer met with a roomful of institutional investors and cracked: “It’s nice to put e-mails to the faces.” His tough talk and swagger may remind some people of another New York prosecutor turned politician, Rudolph W. Giuliani. Some Democrats--starved for toughness--find the parallels intriguing.

Los Angeles attorney Brian Weinstein runs the local chapter of the New Democrat Network, a support group. He and a colleague recently hosted a get-together in Brentwood for Spitzer and a roomful of young Democratic professionals. Spitzer mingled easily with the crowd, Weinstein recalls, and made a friendly, solid impression. It was not a fund-raiser--just an opportunity for people in the movie business, law and other professions to meet the New Yorker. But his hosts recall that, while Spitzer steered clear of specifics, he praised Schwarzenegger’s determination to take on entrenched institutional powers.

“He [Spitzer] comes across like a Democratic Giuliani,” says Weinstein. “This guy is tough. He isn’t afraid to take on white-collar crime. That’s appealing on a national stage.”

Spitzer announced last year that he was preparing to run for governor of New York. It was a logical move for a politician whose favorability ratings were soaring, and whose ambitions for higher office are hardly a secret. In a recent poll by the Marist College Institute for Public Opinion, a politically independent firm, 61% of New Yorkers approved of Spitzer’s performance, the highest rating for any statewide official, including Sens. Hillary Rodham Clinton and Charles Schumer. Although the election is 20 months away, the attorney general led GOP incumbent Gov. George Pataki 60% to 33%, according to the poll.

“It’s clear sailing for him, especially since he does not look like he’ll have any major Democratic opposition,” says Marist poll director Lee Miringoff. “At this point you’d have to like really long odds to beat him in the governor’s race.”

New York GOP strategists tell a different story. Spitzer has yet to be held to real scrutiny by the media, they say, and they charge that his investigations have wrecked investor confidence. They predict his honeymoon will end soon, and gleefully cite the most embarrassing slip-up linked to him. After a losing race for attorney general in 1994, Spitzer borrowed $3 million from his father, a real-estate developer, to pay off bank loans that funded his campaign. But he was slow to acknowledge the existence of the debt he owed his father, and only confirmed it on the eve of his successful 1998 campaign for the same office. The loan has since been repaid, but a spate of newspaper editorials accused him of misleading the public.

“That story isn’t going away,” says Jim McCarthy, a spokesman for Ken Langone, one of the defendants in the case that Spitzer is bringing against former New York Stock Exchange president Richard Grasso. “How can he be trusted?”

As opponents sharpen their knives, Spitzer is acting out an old drama in American politics. Although he is no stranger to party warfare, he campaigns as a reformer, vowing to end business as usual. Others have played the same role, with decidedly mixed results. Billionaire H. Ross Perot lost a gamble that his feisty independence would catch fire with voters in two presidential elections. Professional wrestler Jesse Ventura had a different experience, snaring the Minnesota governor’s office with a caustic, bare-knuckled campaign that effectively portrayed him as an anti-politician. Ronald Reagan, perhaps the ultimate citizen politician, was hugely popular as California’s governor, but he had a mixed record when it came to pushing through reforms. That legacy now haunts Schwarzenegger, who campaigned as a man above politics but who is already struggling to maintain his ambitious agenda and personal popularity.

The mood in New York these days is that the governor’s race is Spitzer’s to lose. And political observers raise a more provocative question about the attorney general’s long-term future. Assuming he wins, what then? Says Fred Siegel, a writer and social science professor at the Cooper Union in New York: “The expectations for Spitzer will be enormous, because people would soon be saying, ‘If he cleaned up Wall Street, how come he hasn’t cleaned up Albany?’ ”

last year, the new york state legislature was named the nation’s most dysfunctional, according to a study by the Brennan Center for Justice at New York University’s School of Law. The Empire State lawmakers ranked worst, or tied for worst, in 11 of 14 policy-making categories that were analyzed nationwide. Only 4.1% of the bills proposed in New York in 2002 were passed; Michigan, ranked best, passed 69% of its bills. California lawmakers approved 41%.

The New York economy is reeling. The state has experienced one of the largest out-migrations of young working people in the country; large swaths of upstate New York, from Buffalo to Rochester, are plagued by unemployment, shuttered factories and a growing sense that there are better opportunities elsewhere.

In announcing his candidacy, Spitzer promised to attack fraud and waste in state government. But the tools available to him will be different--and less exciting. As governor, Spitzer will not be able to humiliate adversaries with subpoenas and lawsuits. He’ll be up against opponents, including some in his own party, who have held power for decades.

“These challenges will be more daunting than anything he has faced so far,” says Hank Sheinkopf, a New York political consultant who helped run Spitzer’s media campaign in 1998, when he was first elected attorney general. “On Wall Street, he’s had a fight of good against evil. In government, you’re lucky to muddle through.”

Opponents already are raising tough questions: How will Spitzer deal with the issue of gay marriage? Why hasn’t he taken a clear position on the proposal to build a football stadium in Manhattan? The state is facing a billion-dollar shortfall in money needed to fund Medicaid programs. Would he raise taxes?

Here’s another story Spitzer loves to tell: one night he tried to initiate a conversation with Elyssa, his 15-year-old daughter. Sounding like an awkward dad, he asked what her favorite word was. She rolled her eyes, indicating that she thought the question pathetic, and snapped, “I know your favorite words: fiduciary duty.”

With apologies to Spitzer’s eldest daughter, the word that best describes him is confidence. As he sits on the 25th floor of a lower Manhattan office building for a rare interview, Spitzer does not look like a person who has tolerance or time for doubt. The carpeted, white-and-blue hallways are bustling with staff attorneys and other aides; Spitzer’s spacious digs include large bay windows looking out over the busy construction pit of ground zero, and the majestic sweep of New York harbor beyond. Photos of family members are scattered throughout the office, and include his three daughters and wife, Silda, who also is an attorney.

Spitzer keeps most details of his life private, but staff members say he jogs early in the morning around the Central Park reservoir. He lives in a luxury building on Fifth Avenue fronting the park, and regularly plays tennis and squash with friends. Asked about his musical tastes, Spitzer once told reporters that he likes Brahms, but ducked a question about his favorite Beatle. Staffers declined to reveal the full contents of his iPod, yet noted that it has a fair amount of Bruce Springsteen.

The man himself has little time for chitchat.

“Yes, yes,” he says impatiently but politely, anticipating a reporter’s question about financial fraud and answering it for him. “No, no, here’s what you need to know,” he says, interrupting another question, then changing the subject.

It’s early in the afternoon, and the day’s newspapers are filled with yet another story about Spitzer’s probe of the insurance business. He’s happy to sit for questions, staff members say, but during a 30-minute session he keeps one eye on a reporter and the other on a secretary gesturing in the doorway. All the while, aides file in and out of the office, leaving memos on his desk or delivering brief verbal messages to him. Spitzer presides over more than 600 attorneys in 14 offices stretching from New York City to the Canadian border.

Spitzer wears what has become a standard uniform: charcoal gray suit, burgundy tie, starched white shirt and black wingtips. He can be a good listener, often leaning forward to answer a question, but tends to dominate the conversation. If you want to hear him talk about his next moves, it’s best to sit back and let him riff. Asked why he got involved in probes of Wall Street fraud, Spitzer says: “We were in a world where Washington, as a matter of ideological disposition, had withdrawn from an enforcement role. We had an obligation to fill what had become a vacuum.”

As for the idea of a new federalism, the push to return more power to the states, Spitzer suggests that pro-business forces are now having second thoughts. They never anticipated that an attorney general like him would take them seriously: “We didn’t mean it,” he says, imagining their mood. “We don’t want you doing this.”

Mindful of the time, Spitzer crisply rattles off the history of each Wall Street investigation. He sounds like a law professor as he describes the Martin Act, an obscure 1921 law that gives him sweeping powers to conduct such probes. Then he becomes a storyteller, describing the origins of his biggest cases. In the mutual fund investigation, for example, a whistle-blower came forward to reveal widespread fraud. In the insurance probes, Spitzer says, his office got an anonymous letter suggesting he look at bid-rigging and inflated fees in the industry, which few had ever investigated.

“I think a lesson is being learned on Wall Street, which is that loyalty to fiduciary duty matters,” he says. “And loyalty to integrity in transactions matters. Every transaction has the possibility of [being] a winner and loser, that’s what the market requires. But when people try to game the system with deceit, the system breaks down.”

The interview is over, but Spitzer allows one last question: Will the attorney general be uncovering other abuses similar to the Wall Street scandals?

“I’m sure we are,” he says with an enigmatic smile. “In fact, I know we are.”

Born in 1959 in Riverdale, an affluent section of the Bronx, Spitzer was the youngest of three children. His grandparents came to America from Europe, and they settled on the Lower East Side of New York after passing through Ellis Island. Jammed into tenements with thousands of other new arrivals, they fought hard to climb the economic ladder.

Spitzer’s parents made a better life for themselves, and his father, Bernard, became a successful developer, with apartment buildings all over Manhattan. Their children would enjoy the finer things in life--but the Spitzers believed people who were lucky to have money had an obligation to make a difference in the world. “We were told early that you’re not here just to make a pile of cash and be comfortable,” says Emily Spitzer, Eliot’s sister, who runs the District of Columbia Bar Foundation. “The goal of our lives had to be to do some greater good.”

There was no room for lazy thinkers in the Spitzer household. Each child was expected to debate political issues of the day at the dinner table, and Emily remembers that conversations about poverty, war and peace could get heated. “There were always a lot of good devil’s advocates in our family,” she says, recalling the arguments. “I guess that’s a foundation for later legal training.”

Eliot, she notes, was bright and popular. He was crazy about sports, especially tennis and soccer, and always seemed highly competitive. He didn’t like to lose, whether at table tennis or in a friendly game of Monopoly. He showed an early flair for debate at the elite Horace Mann prep school, and later at Princeton University. As an undergraduate, Spitzer got his first taste of politics; he was elected student body president and got into shouting matches with college administrators over the low wages paid to campus food-service workers.

Spitzer attended Harvard Law School, which is where he met the woman who would become his wife. He edited the law review and also spent a summer working with migrant laborers in upstate New York. One of his closest friends at Harvard was James Cramer, a journalist who now hosts the “Mad Money” show on CNBC.

“Eliot was the kind of guy who was hard to take seriously at first, because he really believed that the political system could be made to work,” Cramer says. “We thought he was crazy, you know? This was a very cynical time, during the Reagan years, and not too many Harvard law students were as earnest as Eliot was.”

They made fun of him at their peril, Cramer recalls, because Spitzer was enormously smart and relentlessly confident in his arguments. Eventually, Cramer decided that if Eliot’s arguments about politics were laughable, Spitzer himself was not.

After graduating in 1984, Spitzer had a brief and unsatisfying taste of life in a blue-chip law firm and went on to take a job as an assistant district attorney in Manhattan. He rose through the ranks to become chief of the Labor Racketeering Unit, and at one point supervised a sting operation that made a huge media splash. Hoping to wipe out mob influence in the garment district, Spitzer and other staffers set up a phony clothing shop where undercover officers developed ties with members of the Gambino crime family. Eventually they collected enough evidence to bring a celebrated prosecution that drove the mob organization out of the business.

How they did it remains a Spitzer hallmark: Much as he would years later on Wall Street, Spitzer did not throw gangsters in jail. Instead, he got them to pay a whopping $10-million fine and wrung a promise out of them to abandon the garment business.

Several years later, in 1994, Spitzer ran for attorney general. He placed a poor fourth in the Democratic primary, despite spending nearly $4 million. His message, “Total Change,” did not connect with voters, and he sounded awkward in public. Four years later, after driving nearly 40,000 miles throughout the state and building new alliances, he was ready to run again. This race would be different.

“Unlike before, he was focused and he knew what he had to do to win,” says consultant Sheinkopf. “He spoke more intelligently. He learned that relationships are crucial in politics. You need to make people feel that they matter, and he did.”

Spitzer again spent millions on his campaign, but he also contributed generously to a range of local Democratic organizations across the state. In a tightly contested race, he narrowly defeated incumbent Republican Atty. Gen. Dennis Vacco.

Spitzer stepped onto the national stage in March 2002 when he unveiled his charges against Merrill Lynch in the stock analyst case. For some observers, the sight of an elected public official attacking Wall Street in the 21st century was unusual. “Someone like Spitzer is rare, because we don’t have many people willing to take on these targets anymore,” says Steve Fraser, author of “Every Man a Speculator,” a history of Wall Street. “Back in the days of Teddy Roosevelt, when people were angry about the growth of financial trusts, you had a lot of Eliot Spitzers running around.”

Now, Fraser suggests, many politicians are reluctant to crusade against big business, fearing a backlash at the ballot box and charges that they’re endangering jobs. They are also leery of antagonizing the source of so much campaign money. With Spitzer, the author notes, that has not been an issue.

Looking back, few in the attorney general’s office thought they would become known for Wall Street investigations--and sweeping reforms--when they began working for Spitzer in 1999. “These financial cases grew naturally out of the other cases we brought,” says Michelle Hirschman, Spitzer’s top deputy. “You can have a world where all prosecutors do is pillage,” she explains, but “at some level you want to transform folks’ behavior. That’s what this is all about.”

Critics may have a field day with such a comment. But at the very least, Spitzer’s crusades have galvanized other regulatory bodies to play a more active role in monitoring markets--a role they should have played all along. As he campaigns for governor, New Yorkers are bracing for his next crusade.

“There are some legitimate criticisms of Eliot, that he plays too rough,” says McLucas, the former SEC enforcement chief. “But if at the end of the day the worst thing people can say about him is that he’s too harsh, or too aggressive, so be it.”

*

New Hope for Carrier Pigeons

For Eliot Spitzer, e-mail is like oxygen. His eyes light up as he describes the joys of reading internal communications that have been subpoenaed.

“I joke about this all the time,” he says. “I tell people, ‘If I were your lawyer, I’d say, don’t write anything down. But as attorney general, I say, ‘Please continue.’

“Trust me, nothing disappears,” he adds. “It’s all recoverable. And there’s nothing more valuable to me than e-mail written in real time, without lawyers present.”

It proved to be a key factor in the stock analyst probe. Spitzer focused on the issue when he learned of an unusually high settlement that Merrill Lynch had reached with an investor who was angry that his million-dollar stock portfolio had shrunk to $95,000. But the probe didn’t gather steam until Spitzer subpoenaed 30 boxes of e-mail from the company. He and his staff found glaring evidence that analysts working for investment firms had knowingly pumped up the recommendations for sub-par stocks, persuading mom and pop investors to buy them. They did this, Spitzer alleged, to curry favor with the same companies.

In one memorable e-mail, Internet analyst Henry Blodget contradicted a Merrill Lynch report that called LifeMinders, a Web-based firm, “an attractive investment.” Blodget wrote another analyst: “I can’t believe what a piece of [expletive] that thing is.”

Recently, Spitzer says, his office has discovered e-mails where Wall Street analysts tell one another: “Don’t get specific. Spitzer might wind up reading this.”

Others are not amused. Jim McCarthy, a spokesman for one of Spitzer’s targets in a probe of the New York Stock Exchange, charges that the attorney general is causing firms to cut back on their use of an important technological tool.

The evidence may be purely anecdotal, he concedes, but the threat is real. “What are we going to do?” McCarthy asks. “Go back to the Morse Code?”