N.Y. Attorney General Aims to Revamp Brokers’ Practices

The New York state attorney general’s office traditionally has targeted low-level securities fraud, when it has focused on Wall Street at all.

Now, Atty. Gen. Eliot Spitzer is swinging for the fences.

Armed with private e-mails in which Merrill Lynch & Co. analysts disparaged some Internet stocks as “crap” while publicly recommending them to customers in 2000 and 2001, Spitzer earlier this month took the brokerage giant to court, demanding reforms.

The attorney general says he wants to do much more than just embarrass Wall Street: His aim is a fundamental overhaul of how the industry does business.

To that end, Merrill last week agreed to new disclosure policies that will warn the firm’s investors about the potential conflicts of interest between its stock analysts and its investment banking department.

Spitzer’s 10-month probe of Merrill’s research practices found that its Internet analysts routinely felt pressured to tout stocks to aid the firm’s bankers in seeking fee-rich underwriting business from the subject companies.

Spitzer now is negotiating a “blueprint settlement” with Merrill that he hopes will be a model for new federal securities laws addressing brokerage practices industrywide. Meanwhile, his office has expanded the investigation to other major Wall Street firms, subpoenaing e-mails and other documents.

But if the probe has made the 42-year-old first-time attorney general a hero to many small investors burned by the plunge in technology stocks since 2000, it also has stirred a debate over both his motives and his goals.

The cynical view is that, like former New York City Mayor Rudolph W. Giuliani, who won fame prosecuting insider trading as a U.S. attorney in the 1980s, Spitzer hopes to make political hay by tapping the public resentment of Wall Street in the wake of the dot-com collapse and the Enron Corp. scandal.

Spitzer, a Democrat who won office in 1998 by a tiny margin, is up for reelection this year and is regarded as a potential future candidate for governor.

But those who admire Spitzer say that pushing for sweeping reform has been a hallmark of his career, whether his adversaries were electric utilities, handgun manufacturers or organized crime.

Some observers say Spitzer’s decision to battle the big brokerages is politically risky in New York, given the industry’s struggle to recover from Sept. 11.

“Taking on Wall Street is not going to get him elected to anything, it’s just going to make it harder for him to raise money,” said Michael Cherkasky, the court-appointed monitor of the Los Angeles Police Department.

When Cherkasky was an assistant New York district attorney, he recruited Spitzer for the labor racketeering unit, where Spitzer’s biggest case was the 1992 prosecution of Thomas and Joseph Gambino, sons of the late mob boss Carlo Gambino.

The brothers, who allegedly ran a trucking cartel that had a stranglehold on New York’s garment industry, pleaded guilty to one civil count of restraint of trade, paid a $12-million fine and agreed to bow out of the garment center trucking business.

Spitzer showed “extraordinary creativity” in the case, setting up a sting operation in which investigators opened a small dressmaking company, Cherkasky said.

“We were the only garment factory in New York that paid a fair wage and [health] benefits, which is why we lost so much money,” Spitzer joked in an interview last week.

“He’s a very bright and resourceful prosecutor,” Michael Rosen, the New York lawyer who defended Thomas Gambino, said of Spitzer.

In Rosen’s view, the case was a loss for Spitzer because he failed to convict the brothers of criminal charges.

But he gave Spitzer credit for settling the case in the middle of the trial and “salvaging what he deemed most important”--the Gambinos’ exit from garment center trucking.

“It isn’t just ego with him,” Rosen said.

Perhaps incongruous for a Manhattanite with degrees from Princeton and Harvard Law School, Spitzer is a NASCAR stock-racing fan. He came by this interest through his brother-in-law, chief engineer for star driver Jeff Gordon.

Spitzer and his wife, Silda, also a Harvard Law graduate, have three daughters and live on Manhattan’s Upper East Side.

After a clerkship with a federal judge and six years as an assistant district attorney, Spitzer first ran for attorney general in 1994. He finished dead last in a four-way Democratic primary, despite spending more than $4 million of his own and his family’s money.

Spitzer’s 1998 campaign, again largely self-financed, was one of the nastiest on record, with Spitzer accusing incumbent Republican Dennis Vacco of patronage and racial insensitivity and Vacco firing back with accusations that Spitzer illegally accepted too much money from his father, Bernard, a wealthy New York landlord.

Spitzer denied breaking any laws, but late in the race he was forced to admit something he had earlier denied--that his father had lent him $3.8 million to cover debt from the 1994 campaign.

Since taking office, Spitzer has tried to use the platform of a regional prosecutor to address national, if not global, issues.

For example, in litigation that still is pending, he sued a group of Midwestern utilities on the grounds that emissions from their plants were responsible for acid rain and respiratory problems in New York.

Though he often makes headlines, Spitzer doesn’t always achieve results. He unsuccessfully tried to use a state public nuisance statute to impose sweeping design and distribution changes on the handgun industry.

In the arena of securities regulation, however, New York laws may give Spitzer a stronger hand, according to Columbia University law professor John C. Coffee.

New York’s securities code, the Martin Act, provides both criminal and civil fraud penalties, and it gives a prosecutor the power to hold “quasi-inquisitional hearings” in front of a state supreme court justice and in public, Coffee said.

For a prosecutor bent on “ceremonial humiliation,” it would be the perfect tool, Coffee said.

For the securities industry, Spitzer’s probe must be particularly frightening because it seems to come out of left field, Coffee added.

“Wall Street is used to the attorney general being more of a patron,” he said.

Stock market regulation, of course, is the main turf of the Securities and Exchange Commission. Spitzer’s explosive allegations have been awkward for the federal agency, which sometimes has been criticized for a lack of aggressiveness in policing Wall Street.

Spitzer sounded a conciliatory note last week.

“I don’t want to criticize the SEC,” he said. “I’m not of the view that the New York attorney general’s office [by itself] is in a position to remake the securities world. We will be cooperating with them.”