TCS Daily

Assessing Eliot

By Stephen Bainbridge - August 25, 2006 12:00 AM

In November, Eliot Spitzer likely will be elected as New York's next governor. Whether that will be good news for New Yorkers is perhaps debatable, but it's great news for America's economy.

It would be unfair to call Washington Post journalist Brooke Masters' biography of New York's crusading attorney general, Spoiling for a Fight: The Rise of Eliot Spitzer, one-sided. Masters presents the arguments of Spitzer's many critics and does so reasonably fairly. So while Spoiling for a Fight isn't mere hagiography, at the end of the day Masters comes down on Spitzer's side of most controversies. She puts Spitzer into the crusading progressive hall of fame alongside such luminaries as Louis Brandeis, Thomas Dewey, Teddy Roosevelt, and Rudy Giuliani.

What's interesting about the other crusaders to whom masters favorably compares Spitzer, of course, is that they all used their crusades to advance their political careers. Before he was the hero of 9/11, Giuliani rode his mob and white collar prosecutions as a US Attorney in New York City to the Mayor's office. Brandeis' cause lawyering got him to the United States Supreme Court. Teddy Roosevelt's reputation as a reforming police commissioner helped get him to the White House, although San Juan Hill probably helped more (and Leon Czolgosz helped too), a pattern Giuliani apparently hopes to emulate. And, of course, Thomas Dewey got the chance to famously lose the presidency to Truman.

A fair reading of Eliot Spitzer's record as presented by Masters suggests that he is both a genuine cause crusader and a career political hack. Spitzer has consistently used -- and abused -- his authority as New York attorney general to level sweeping accusations against a wide swath of American business. In some cases, like the proverbial stopped clock, he got it right. In a lot of cases, however, the much ballyhooed charges got a lot of press attention but then quietly went away. Indeed, on the few occasions he's taken one of these high profile business cases to trial, he's lost at least as often as he's won. Instead, his record consists mainly of using media pressure to extort settlements from frightened executives.

Spitzer and the Mutual Fund Industry

Let's take just one set of Spitzer cases as our paradigm; namely, the mutual fund late trading "scandal."

Alliance Capital was one of the mutual funds caught up in the late trading/market timing scandal. In order to settle charges brought by NY attorney general Spitzer, Alliance offered to do something that had nothing to do with either late trading or market timing; namely, to cut the fees it charged investors. Alliance knew that was the fastest way to Spitzer's heart. As the Wall Street Journal reported:

"Fees, fees, fees -- that's the big money," Mr. Spitzer crowed to his top lawyers after hearing from Alliance. "When we have a company in this position, we shouldn't give up our leverage to negotiate about the issue that's the 800-pound gorilla."

The trouble was that Spitzer has no legal authority -- none, nada, zilch -- to regulate mutual fund fees. As former SEC Commissioner Ed Fleischman told the Journal:

He's showing an investing and voting public that he can be its champion and make companies shake in their boots ... But a prosecutor making policy can be dangerous if he becomes extortive.

It's as though you got busted for pot possession and the DA said you had to give up snowboarding. What business does the prosecutor have using his leverage that way? What right?

Even if he had regulatory authority over fees, moreover, Spitzer's attack on them would still be misplaced. The industry is highly competitive. Fees are fully disclosed and it's relatively easy for unhappy investors to switch from one fund to another. Put simply, there was no market failure to justify regulation of fees. Instead, Spitzer was engaged in populist paternalism.

Balkanizing the Economy

Masters correctly notes of the mutual fund and other cases that the controversy "over Spitzer and his imitators in many ways reflected the larger fight over competition between state and federal regulators." I would put the point more strongly: The controversy over Spitzer reflects the one of the fundamental reasons the Founders chose to replace the Articles of Confederation with our Constitution.

To be sure, Spitzer got away with a lot of his crusades because the SEC seemed to have fallen asleep at the switch, creating a regulatory vacuum he was only too pleased to fill. The whole point of having federal securities regulation, however, is to avoid balkanizing the capital markets by competing state regulations. Spitzer's litigation crusades reintroduced just such Balkanization, as the rules in New York either differed from those in other states or, worse yet, Spitzer tried to have New York set the rules for the whole country.

As I asked in my earlier TCS column, Spitzer Goes Over the Line, did not the Founding Fathers adopt a Constitution in large part to avoid the economic Balkanization threatened by the Articles of Confederation? And, as I explained in that column, one can be a competitive federalist and still think the SEC should have shut Spitzer down in order to protect the national capital markets.


Spitzer is a master of trying cases in the media. When forced to take cases to court, however, his record is mixed, at best. In 2005, for example, one of the few mutual fund cases to go to trial ended in a defeat. Former Bank of America broker Theodore Sihpol was acquitted on Thursday of 29 of 33 criminal charges brought by Spitzer alleging that Sihpol helped a hedge fund illegally trade mutual funds. The jury deadlocked on the other 4 charges.

In 2003, Spitzer's much ballyhooed lawsuit against the gun industry, which advanced the novel legal theory that otherwise legal guns are a public nuisance, was shot down by a 3-1 New York state appeals court decision. Master quotes Spitzer as sloughing off the loss with the quip "There are some cases you bring knowing the probability of success is not great." True, but as a matter of legal ethics, the claims made in litigation must be "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law." In this case, Spitzer pushed the edge of that envelope, as suggested by the New York court's rebuke:

[T]he Legislative and Executive branches are better suited to address the societal problems concerning the already heavily regulated commercial activity at issue.

Doing It All for Political Gain?

The Economist magazine once called Spitzer "publicity hungry," a point Masters implicitly admits in writing that Spitzer's crusade against stock analysts had the "heady side benefit" of fawning media attention. Yet, there is a dark side to the story to which Masters gives inadequate attention. as the Wall Street Journal reported:

[T]o a host of Empire State charities and well-connected law-school deans, the crusading New York attorney general is acting a lot ... like Santa Claus.

Three civil settlements he struck in an unusual case against wealthy telecom executives and IPOs have allowed him to bestow more than $5 million in largess over the past several months to dozens of community groups across New York state. The recipients are intended as a sort of proxy for individual investors who allegedly suffered from the actions of the defendants, who were accused of profiting from undisclosed awards of sought-after initial public offerings from investment bankers seeking their business. ... But the groups receiving the windfall also represent voter constituencies that could be key to Mr. Spitzer's widely expected Democratic run for governor in 2006.

In sum, Spitzer appears to have used his prosecutorial powers for personal political gain.

We learn just a little of what makes Eliot Spitzer tick from Masters. What does clearly emerge, however, is the boundless nature of Spitzer's ambition. He is unlikely to settle for being governor of New York; instead, he clearly wants to follow the path to the White House blazed by former New York governor Theodore Roosevelt.

It's a fair bet that Spitzer's adversarial personality and penchant for conflict will serve him less well in executive office than it did as attorney general. It's also a fair bet that it will be a very long time before this country again elects a Northeastern liberal to the Presidency (see, e.g., Kerry and Dukakis). For those who have doubts about Spitzer, however, eternal vigilance would seem to be the order of the day.

The author is a TCS Daily contributing editor and teaches law at UCLA.



Truth, justice, and the American way
Keeping businesses honest, even at the price of distroying large companies, is not necessarily bad for the economy. Spitzer attacked finance industry practices that he (and most New Yorkers who don't write Op/Eds in the Wall Street Journal) thought were ripping off the small investor. These included mutual funds allowing big customers to trade after hours at a closing price that already was old, and "researchers" manipulating stock prices.

The Spitzer road to fame was paved by do nothings in Washington (SEC, DOJ) of the kind Bainbridge seems to like.

I don't remember when Teddy Rosevelt was prosecutor, but Guliani lost his share of cases and grandstanded by ruining the reputations of the unconvicted (e.g. the "perp walk").

Spitzer has shown he will destroy anyone, in order to advance his career.

Who's Truth, Whose Justice, Who's Way
Lg's post is the exact type of nonsense that allows a Spitzer or Giuliani (both cut from the same cloth) to succeed at prosecutorial entrepreneurship. Calling the SEC ot DOJ do-nothing is lunacy, they've both been very busy since Sarbanes Oxley.

On those occasions when a prosecutor does his job, he need not be lauded for it. On the other hand Spitzer, Giuliani and some others are notorious self-aggrandizing publicity hounds. For every deserving prosecution, these guys can be found abusing their power with cases of dubious legal merit (such as what was cited) and there's no recourse against vexatious or malicious prosecution.

Consider an example from a guy who's old news. In the 19080's, John Garamendi used the post '86 tax reform real estate price slide to force First Executive Life into receivership, instead of putting them under supervision and waiting for the recovery of the market to fatten asset values. This kicked in a variety of provisions that locked peoples money up. There were other, less drastic measures that would've served the policyholders better-but they wouldn't have generated the publicity.

A.G. should never be a stepping stone office- its too dangerous.

Classic Case
Eliot Spitzer is another example of the classic case of a good guy who lets the power of office go to his head. We are all capable of it, especially those of us who deny the possibility of it.

unlimited resources
Everyone forgets that the US govt. through the US AG office has virtually unlimited resources to
[1] subpoena (compel) witnesses
[2] conduct investigations
[3] empanel grand juries
[4] hold press conferences
[5] elevate political considerations above costs and consequences to 1-4.

AG targeted companies are at a disadvantage and will often weigh the monetary costs of an out of court settlement vs the monetary, reputational and market share costs of a full trial.


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