Eliot Spitzer: Wall Street’s Top Cop

Now that headline writers refer to eliot spitzer with comic-book-hero honorifics like “the Enforcer” or “Sheriff of Wall Street,” it’s worth remembering that when the New York State attorney general began his breakthrough investigation of Merrill Lynch in 2001, he wasn’t sure what he was doing. A general suspicion about the veracity of investment bankers’ advisories had prompted Spitzer to launch a bit of a fishing expedition into Merrill’s records. It wasn’t turning up much, however, until early 2002, when Eric Dinallo, Spitzer’s top aide on the project, came into his office and showed him a blue binder full of e-mail he had compiled that suggested Merrill’s analysts had downgraded an Internet company, GoTo.com because it hadn’t given Merrill its investment-banking business. Spitzer scanned the pages and realized that, with this e-mail, Dinallo was hitting pay dirt. “Get them all,” he said.

Wall Street would never be the same. Spitzer opened an investigation that in just a few months began fundamentally reshaping America’s financial markets. Analysts, Spitzer would show, were doctoring their reports–which the public relies on for stock information–to win business for their banks’ investment arms or to downgrade companies that didn’t play ball. Insiders knew the scam; folks in the heartland had no idea. Spitzer’s aggressive pursuit of Merrill Lynch and, subsequently, a dozen other Wall Street firms turned the tables. The new ethics he championed are touching in their simplicity: analysts’ ratings should reflect what they actually believe. There has not been such an affirmation of what’s right since Moses and the Ten Commandments. “The system was rotten, and no one seemed interested in fixing it,” says Spitzer. “So we moved in.”

For many Americans, 2002 will go down in history as the year corporations failed them. Story after incredible story of greed and wrongdoing has created an array of new bogeymen: Tyco’s Dennis Kozlowski (31 felony counts), Enron’s Andrew Fastow (indicted for wire fraud, money laundering and conspiracy), ImClone’s Sam Waksal (insider trading). Politicians have huffed and chuffed about how to fix the system, but legislation proposed to date is likely to lack teeth. The Bush Administration responded late to the public’s sense of outrage, then seemed to lose focus. In the end, the only man who appeared to be serious about cleaning up the rot was Spitzer, 43, a relatively unknown state official armed with the law, a streak of fearlessness and boxes full of incriminating e-mail.

Spitzer has spent a career pushing the law as a tool for social change. A passionate and partisan Democrat, he has brought cases against a long line of tough adversaries–organized crime, gun manufacturers, air polluters, Korean grocers who don’t pay minimum wage. His efforts have not always succeeded. Yet he has consistently used laws in novel ways to address wrongs that were in plain view but seemed intractable to others. And, as was the case with Merrill, his endeavors have been about pursuing a path of justice even before the precise nature of a case is clear. “He’s the real deal,” says Alan Dershowitz, a Harvard Law School professor who hired Spitzer, in his second year at the school, as a research assistant in the 1980s to help on the Claus von Bulow defense. “He has a creative and innovative mind, and he always wants to do what’s right.”

Spitzer’s gift is a plain-talking sensibility. He was a brilliant student and a star athlete, but he doesn’t connect emotionally with people or ooze charisma like a Bill Clinton. He is attractive, though not in a classic way. His strikingly deep-set eyes underscore his drive and intensity. And his pronounced chin once moved the New York Times to comment, “His jaw actually juts.” Spitzer has a cheeky sense of humor. (At the Institutional Investor magazine awards dinner for market analysts in November, he opened his speech by saying, “It is wonderful to be here this evening, because I really want to put faces to all those e-mails.”) His competitive streak makes him a formidable foe. “Debating with Eliot Spitzer is like wrestling with a grizzly bear,” says William Taylor, an old friend and founding editor of Fast Company. “You don’t hope to win, just to get out alive.”

To many Americans, Spitzer in 2002 personified integrity and trust. After the Internet boom blew out and their stock and 401(k) holdings evaporated, it was nice to find someone–anyone–who seemed to be fighting on their behalf. By taking on Wall Street, Spitzer clearly touched a chord. At the exclusive University Club in midtown Manhattan, under tall marble columns resembling those of an Italian palazzo, a well-dressed gentleman walks through a crowd toward Spitzer just to say, “Keep it up, Eliot!” Later, outside the attorney general’s office near Wall Street, a young man crossing the street recognizes Spitzer and calls out, “Don’t give up the fight!” Upstate, in Rochester, after Spitzer delivers a speech to local Rotarians, Bob Maney, a stockbroker at Prudential Financial (and a Republican to boot), says, “He’s pushing the right buttons.”

The rap on Spitzer is that he’s ambitious, that he has his eye on a bigger prize. To his (off-the-record) critics on Wall Street, his pursuit of investment banks smacks of opportunism and grandstanding, of a public official out of control. “This could have been handled more effectively away from the glare of the press,” says a senior executive at one of the banks Spitzer has gone after. But if this is all a political ploy, a platform from which to run someday for, say, Governor of New York, it’s certainly not in most politicians’ playbooks to take on the moneymen who rank among the most powerful people in the U.S.–and whom he might need one day to help finance a campaign. Spitzer, a child of privilege who attended Horace Mann School in the Riverdale section of the Bronx, N.Y., Princeton and then Harvard Law, has studied or socialized with a lot of these Wall Street types. “I have friends in the industry who think I’m doing the wrong thing,” Spitzer says. James Cramer, an old friend who does market commentary for TheStreet.com and other media, is blunter: “Everybody on Wall Street hates this guy.”

Spitzer didn’t help his case at the Institutional Investor dinner. He surprised himself by accepting the invitation and surprised his wife, Silda Wall, by delivering the speech he had drafted. After the e-mail crack, he went on the offensive. He told the crowd that the awards–for the magazine’s 31st annual All America Research Team–were essentially a sham and that, on the basis of his research, virtually none of the honorees merited praise. Several attendees muttered expletives and walked out.

When Spitzer gave the order to subpoena every relevant e-mail he could get his hands on, he had no idea he would get the smoking guns that materialized. Merrill Lynch complied promptly, perhaps unaware of the documents’ incriminating nature. Over six weeks in March and April, the investment bank sent 30 big boxes of e-mail, snapshots from the hard drives of Internet-company analyst Henry Blodget and his team.

It was a new experience for Spitzer, who had never tried to build a case from an unsorted, unedited stack of e-mail. For more than a month, Dinallo, who runs the investor-protection arm of the office, and a few associates hunkered down, reading the messages at work, over lunch, in bed at home. An empty office became the war room, a place where the staff could read and catalog what turned out to be 94,439 pages of e-mail. “I read a large portion of them,” says Dinallo, a bright, energetic lawyer whose off-hour passions are chess and vintage comics. “You’re getting these conversations in real time, learning how they talk and think.”

The investigation began on a shoestring in June 2001, when the attorney general’s office, inspired in part by a Wall Street Journal article, issued a subpoena to Merrill asking for documents related to GoTo.com and another Internet company, InfoSpace. Spitzer dusted off the Martin Act, a 1921 New York statute that allows the attorney general’s office to launch broad investigations of securities companies. “Martin,” Spitzer concedes, “is generous to prosecutors.” His interest picked up the following month when he learned that Merrill Lynch had settled promptly and magnanimously with a New York City pediatrician who charged that his $1.2 million portfolio had been nearly wiped out by Blodget’s allegedly tainted boosterism for tech stocks, including InfoSpace. The $400,000 settlement energized Spitzer. “I looked at that,” he says, “and thought, There has got to be something there.”

It was the 30 boxes of e-mail that began arriving in March that made the case. In early spring Spitzer confronted Merrill with the evidence. Merrill complained that they had been taken out of context but appeared willing to settle. What Merrill didn’t want was having everything made public. That’s where it underestimated Spitzer’s resolve. He held out for disclosure and on April 8 filed an investigative action against Merrill. That day he held a press conference and released the most egregious of the e-mail.

They became instant classics. A Merrill research report from Dec. 21, 2000, for example, called an Internet company, LifeMinders, “an attractive investment.” But earlier that month, a Blodget e-mail had said, “I can’t believe what a POS [piece of s___] that thing is.” Spitzer has another favorite–a Blodget missive, now known in the office as the “smoking-gun” document, that says if his team doesn’t get any guidance from above, “we are going to just start calling the stocks … like we see them, no matter what the ancillary business consequences are.” Says Spitzer: “You had to love it. Blodget made it clear he genuinely didn’t believe his own ratings.”

With the e-mail public, Merrill felt its reputation was beginning to suffer. It finally agreed to settle, without admitting wrongdoing, on the condition that there be a broad agreement precluding similar suits by other zealous state attorneys general. The deal was pounded out. In the end, Spitzer says, he didn’t negotiate the fine. He called Merrill Lynch’s lawyers and recalls saying, “It’s $100 million. It won’t kill you. I want this settled tonight.” Merrill agreed to pay the fine, apologize and reform the way it paid its analysts. The public applauded the deal, though Spitzer was criticized. Some felt he was too lenient with Merrill, which can easily afford $100 million (average profit over the past three years: $2.35 billion). Moreover, no one went to jail. Others say he was too harsh, meddling in an area in which he had no expertise or clear jurisdiction. Spitzer agrees that the Securities and Exchange Commission (SEC) was ideally placed to pursue the case; when it didn’t, he stepped in. However, he says, he never sought crippling penalties. “I began this with the premise that we did not want to challenge the financial viability of Merrill or any of the others.” No perp walks necessary.

The first shot had been fired. But Spitzer was not done. His office led an effort to subpoena e-mail from a dozen other investment banks. The cases were later parceled out for several other states to pursue: California got Deutsche Bank, for example; Massachusetts got CSFB. The SEC jumped in after the Merrill settlement, and Spitzer and the SEC’s director of enforcement, Stephen Cutler, began working on a comprehensive deal to settle all 12 cases at once.

When Spitzer meets in his office to discuss big cases like these, he sits at the head of the table, ramrod stiff. His feet don’t tap; his fingers don’t twitch. The scene is like trick photography. Everyone else is in motion–shifting, wiggling, scratching–while Spitzer is still. But when he needs to, he can crank up the passion. When he felt negotiations with the 12 banks had dragged on too long, he decided to play tough. He instructed the top lawyers of five of the major banks to come to his office. When they arrived, he lit into them. (One CEO was also present, Morgan Stanley’s Philip Purcell.) “Spitzer was harsh, irate, yelling at times,” one of the lawyers told TIME. Spitzer said he was fed up with their haggling, that they should be ashamed of what they had done to investors, that they were acting “like children in a sand box.” He told them to settle at once or he would start bringing cases. At the end, he said, “Any questions?” The group was silent. Knowing that he had followed up on a similar threat to Merrill Lynch, the banks caved. Spitzer announced the settlement two days later, on Dec. 20. The banks agreed to pay a total of about $1.4 billion in fines and other penalties.

Spitzer is still working out the details of a separate case against five CEOs, calling on them to return profits made from stock offerings arranged by Salomon Smith Barney. On the basis of another roundup of e-mail, Spitzer says that Jack Grubman, then Salomon’s chief telecommunications analyst, engaged with the executives in “spinning,” a practice whereby a bank allocates hot, essentially risk-free shares in companies about to go public to CEOs of prospective clients. In return, the CEOs give the bank business, confident that, in turn, their own stocks will receive favorable ratings. It was from this email that the public learned that rich investment bankers do favors to get their associates’ kids into the right preschools.

Spitzer’s case against Wall Street is as gutsy as his earlier pursuit of Mob interests in New York City. Everyone knew that organized crime controlled the trucking business in the city’s garment center, but no one could figure out how to crack it or how to make the case. At the time Spitzer was the 33-year-old chief of the labor-racketeering unit at the Manhattan district attorney’s office. A few attempts to wire undercover agents had failed, in part because the target–the notorious Gambino family–was wary of such tricks. So Spitzer came up with a high-risk plan to set up his own sweatshop. He brought in a state trooper to run it undercover, then hired 30 laborers who had no idea it was a front. The shop set up on Chrystie Street in the city’s garment district, turning out shirts, pants and sweaters. But the sting took longer than anyone had anticipated. “Every two weeks Eliot would come in asking for more money,” says Michael Cherkasky, who headed the investigation division (and is now president of risk-consulting firm Kroll Inc.). “We were actually stuck running a business–and losing money. I said, ‘Eliot, you’re becoming a shmatte salesman?'” But the shop manager eventually got close to the Gambinos, and officials were able to plant a bug in their office, in an elaborate ruse that involved picking locks, switching off alarms, disrupting utilities and distracting guards.

The wiretaps and other material produced evidence of a conspiracy in which a few families agreed to carve up the garment-industry trucking business among themselves. The trick was bringing a case. There was evidence of extortion, Spitzer recalls, but it was ambiguous, and cases like this had failed in the past. So he charged the Gambinos with something that could stick, an antitrust violation. Thomas and Joseph Gambino and two other defendants took the deal and avoided jail by pleading guilty, paying $12 million in fines and agreeing to stay out of the business. “It was imaginative and smart,” says Cherkasky, who calls Spitzer one of the “best and brightest” lawyers he has worked with.

The Eliot Spitzer story begins on the Lower East Side of Manhattan, where both his parents grew up. His father Bernard was reared in a tenement with no heat, sharing a bathroom in the hall with the neighbors. Bernard, whose father had been an officer in the Austrian army, was intensely driven. He qualified for an elite school in the city and managed to graduate from City College at 18. A civil engineer by training, he went into real estate and made his fortune. He has constructed about a dozen properties in Manhattan, among them several high-end buildings on the edge of Central Park, including the Fifth Avenue tower in which Eliot now lives with his wife and three daughters. Spitzer’s mother Anne grew up in modest circumstances. She became an academic and teaches literature at Marymount Manhattan College in New York.

The Spitzer home in suburban Riverdale was comfortable but not showy. Spitzer was a top student and athlete (he captained Mann’s tennis team), though his parents never focused on that. They recall attending just one soccer game, the last of the season in his senior year, arriving just as Eliot was called for a penalty. “Free kick, they lost,” his father says with a laugh. The parents concentrated on their children’s intellectual side–in ways that made their friends snicker. One of the kids–Spitzer is the youngest of three–would be made responsible for leading a dinner discussion on a topic of the day. When they traveled, they would test the kids on what they were seeing. The Spitzers also attempted to impart a sense of compassion. “We tried to teach them that it isn’t enough just to make your own pile,” says Bernard.

Spitzer took it to heart. While still an undergraduate at Princeton, he took off for the South one summer to work at menial jobs. He hit the day-labor agencies at dawn and took whatever was available–stacking fiber-glass insulation at a warehouse, operating a jackhammer, cleaning up a sewage overflow at a hotel. He also worked that summer as a migrant laborer in upstate New York, side by side with Mexicans picking tomatoes. “I’d had a comfortable upbringing,” says Spitzer, “so I wanted to experience harder work, to see the world from a different perspective.”

There was no rebellious stage in Spitzer’s life, no long-hair days. But his competitiveness, especially in athletics, was directed as much at family as friends. In some well-to-do households, there is a rite of passage in which the son finally beats the father at tennis. As a teen, Spitzer found himself near that goal one day, closing in for the kill. When his father paused to catch his breath, Spitzer called out, “Mom, Dad is stalling!” The family still talks about the time Bernard cruelly whipped his son in Monopoly.

At Princeton, Spitzer entered the Wood-row Wilson School of Public and International Affairs. He got good grades and listened to Bruce Springsteen (he just went to Albany with an ex-classmate to see the Boss for the fourth time). He was elected president of the student body in his sophomore year. Colleagues remember his taking on the university administration over divestiture from South Africa and (a student classic) higher wages for campus service workers.

He went on to Harvard Law, where he wrote his way onto the prestigious law review. Market commentator Cramer, who met Spitzer on their first day, tells an anecdote meant to show the roots of Spitzer’s rectitude. For a criminal-procedure class, Cramer says, he organized a group of students to alternate attendance and share notes. Spitzer, he claims, thought it was gaming the system and threatened to tell the professor. Spitzer says it’s a good story but untrue. Either way, Cramer’s tale is revealing (about both men): “Eliot was earnest in an atmosphere where you felt stupid to be earnest. He was kind of a goofy guy–so straight, he didn’t have an ounce of guile.”

After graduating, Spitzer clerked for a judge, then joined the firm of Paul, Weiss, Rifkind, Wharton & Garrison, a job he found unfulfilling. He did what almost no one does–quit the firm before the requisite resume-enhancing two years. Next he joined the Manhattan district attorney’s office, where he spent six years pursuing the Gambinos and other big-time criminals. He returned to private practice, this time at the firm of Skadden, Arps, Slate, Meagher & Flom, before making a sudden decision in 1994 to run for New York attorney general. He got crushed, finishing fourth in a four-way primary race. Worse, opponents later claimed he relied improperly on family wealth to finance his campaign, a charge that became an issue in his next race.

Spitzer then helped found a private law firm, Constantine & Partners, and began planning for the following election. He traveled up and down New York, rubbing shoulders with key state political players and meeting the masses. He hit almost every county, putting 70,000 miles on the family minivan. Keith Wright, a state assemblyman from Harlem, remembers campaigning with Spitzer, walking into subway stations, senior centers, hairdressers’. At the end of the day he offered Spitzer a ride home. Spitzer declined, saying he would catch a gypsy cab. “I thought, That’s my man,” Wright says. “Man of the people–in a gypsy cab. Not bad for a stiff little white kid from Riverdale.”

The 1998 election foreshadowed the presidential vote of 2000. The race between Spitzer and the incumbent, Dennis Vacco, was so tight that it took six weeks before Spitzer was finally declared the winner, by about 25,000 votes. (In a memorable dissent, Vacco claimed that “dead people” and illegal immigrants had voted for Spitzer, a charge immortalized in the tabloid headline ALIENS STOLE MY ELECTION.) The new attorney general began looking for cases that mattered. Using an obscure section of the federal Clean Air Act, he took on polluters in the Midwest in 1999, arguing that winds bring their acid rain to New York. Two power companies agreed to pay a total of $2.6 billion to clean up 18 power plants, though the Bush Administration’s efforts to gut the act have stalled the cases. Spitzer challenged gun manufacturers who supply retailers involved in illegal sales. Though the case has not yet succeeded, Spitzer used a novel legal tool–the “nuisance law,” arguing that such firearm sales created a “harmful condition” that required a change in business practices. Then in 2001 he began his pursuit of Wall Street.

What will Spitzer do for an encore? His success fighting the investment banks raised his profile and has created hopes in some New York Democratic circles that he will run for Governor in 2004. Spitzer’s wife says she has never once heard him talk about such an ambition; he says only that he “won’t rule anything out.” For now, he’s focused on the law. His battles are complicated, and it’s hard to tell when, exactly, he’s entitled to a victory dance. “The cases against Wall Street are like stopping someone speeding on a highway,” he says. “The other cars slow down for a while, and then, after a certain number of miles, they speed up again. The question is, How many miles before they start speeding again?” Our hero, the “Caped Highway Cop,” awaits.