Clear Vision Guides Success of a Corporate Watchdog

When Eliot Spitzer unveiled his blockbuster investigation of the insurance industry last month, he once again displayed a knack for seeing wrongdoing where other regulators simply see doing.

Indeed, by cracking down on long-standing payment practices that were open secrets in the business and well-known to other authorities, Spitzer underscored what has become a trademark of his tenure as New York’s attorney general: a willingness to say that just because something is considered standard operating procedure, it doesn’t mean it’s proper.

“A lot of it is that he’s just got guts,” said Frank Partnoy, a University of San Diego law professor and author of two books on Wall Street shenanigans.

When it came to conflicts of interest among stock analysts, for example, the Securities and Exchange Commission tiptoed around complaints about tainted research until Spitzer arrived on the scene.

Market timing and late trading by mutual funds, meanwhile, were well-known practices among Wall Street’s stock-trading fraternity -- and considered acceptable by many until Spitzer began poking around. (Market timing is the rapid in-and-out trading of mutual funds, a tactic that can skim profits from long-term fund shareholders. Late trading involves select investors buying and selling funds at a particular day’s price after the close of the markets.)

Likewise, Spitzer’s insurance probe has the feel of someone finally willing to stand up and say that the emperor has no clothes.

Although the inquiry has turned up evidence of bid rigging -- a clear case of fraud, if proved true -- much of its focus has been on stopping the decades-old tradition of insurance companies paying brokers such as Marsh & McLennan Cos. to steer business their way.

Whether with analysts or mutual funds or insurers, “there was nothing that he saw and heard that everybody else didn’t know about,” said Bill Singer, a securities industry attorney.

All of which raises the question: Why has Spitzer gone after abuses that others have ignored?

Some say the attorney general, a Democrat, is trying to make his mark as he prepares for an expected run for the governorship. Others believe that he is a shameless publicity hound.

“The paradox of Eliot Spitzer,” Singer said, “is the more successful he is, the more people wonder what his angle is.”

For his part, Spitzer says he can’t quite figure out why other regulators haven’t seen the world -- what’s right and what’s wrong -- as clearly as he has.

“Why nobody else has done it, I have not the foggiest idea,” he said in a recent interview.

One thought, perhaps, is that others simply got “too close to the industries they were supposed to regulate,” Spitzer surmised. “Therefore, they did not ask tough questions about either analysts or mutual funds or the insurance industry.”

Unlike the SEC, the New York Stock Exchange and the NASD, which oversee the quotidian goings-on of Wall Street and the securities markets, the New York attorney general has historically played only a bit role in financial oversight.

That has left Spitzer’s team with less institutional knowledge but with a fresh eye for assessing corporate behavior. And unlike their colleagues at the SEC, Spitzer’s investigators don’t need to worry about having to placate lawmakers on Capitol Hill, many of whom have conflicting agendas.

“Regulators knew [analyst abuses] existed but didn’t see the forest for the trees,” said David Robbins, a New York lawyer who was a special deputy attorney general in the 1970s.

Growing up, Spitzer was an unlikely candidate to become a hero of individual investors.

He was raised in a well-to-do area of the Bronx before setting off for Princeton University and Harvard Law School. He joined the Manhattan district attorney’s office in 1986, before leaving in 1992 for a brief stint at a private law firm.

He ran for attorney general in 1994 but was crushed in the Democratic primary. But he was a strong campaigner and, aided by family wealth, won by a razor-thin margin in 1998 before coasting to reelection two years ago.

In his first analyst case, Spitzer subpoenaed now infamous e-mail messages in which Merrill Lynch & Co. analysts privately disparaged the stocks they were recommending publicly. No other regulator had asked for e-mails.

Merrill executives lambasted Spitzer -- who at the time was little known even to New Yorkers -- as “just plain wrong” and said he had “a fundamental lack of understanding” of Wall Street.

But Spitzer stood his ground and eventually engineered a historic settlement in which Wall Street firms paid $1.4 billion to end probes into whether analysts touted stocks to lure corporate financing work to their firms. Merrill ponied up $200 million of that.

These days, Spitzer’s reputation helps enormously. Both the insurance and mutual fund investigations were spurred by tips from insiders.

“No one would have gone to the SEC, but they went to him because they know how honest he is, and he can’t be intimidated,” Robbins said.

Spitzer also has been helped by circumstances.

He targeted analysts after the stock market sank and investors were hungry for scapegoats. And although he is working on a shoestring budget compared with his federal peers, Spitzer has benefited from New York’s powerful securities law, the Martin Act, which gives him wide latitude to bring civil and criminal charges.

“Part of it is that he’s in New York,” Partnoy said. “Without that, it’s much more difficult.”

The e-mails also have been important. Spitzer said he might not have been nearly as successful without them, and acknowledged that future cases would be tougher to come by if people became circumspect about memorializing their misconduct in print.

“We can only make these cases as long as people are foolish enough to keep writing this stuff down,” Spitzer said with a laugh. “People write stuff down they shouldn’t. As a prosecutor, I’m thrilled that they do.”