Spitzer's Lean and Hungry Look

UPDATED: edited for style 10/23

Bulletin from the front: New York Attorney General Eliot Spitzer, a Democrat, wants the Governor job. Two weeks ago, however, Spitzer lost a case with big implications, detailed below. But first, some background about America's most zealous lawyer.

With voting a year off, polls give Spitzer a commanding lead over each potential Republican gubernatorial opponent:

• The "charming" William Weld, formerly governor of Massachusetts. Socially leftist and economically conservative, Weld couldn't eject John Kerry from the Senate, then quixotically quit as Governor to become President Clinton's Ambassador to Mexico only to be "blocked in the Senate by a fellow Republican, Jesse Helms, who thought Mr Weld too liberal." A native New Yorker, Weld may have been wowed by Senator Hillary Clinton's 2000 election victory, betting carpetbagging can strike twice.



• Billionaire Tom Golisano who likens himself to an Empire State John McCain but became Republican only two weeks ago, and "couldn't buy" the election in three previous tries as an Independent.

The son of "a well-connected and fabulously wealthy real estate mogul," the Princeton-educated, Harvard law and Law Review alum, Spitzer lives on upper-crust Park Avenue. Yet -- like Rudy Giuliani -- New York's Attorney General "is using his position as a corporate crime buster" to polish a populist persona. In heavily-Democratic New York (Kerry over Bush by 18 percent), Spitzer sparks comparisons to Teddy Roosevelt (who advanced from New York City Police Commissioner to Governor to the White House) and is considered virtually a lock next November.

Spitzer's tough-guy reputation stems from targeting big companies and their corporate officers with stage-managed David-verses-Golaith scripts, "For six years now, the New York attorney general has been building a national reputation by taking on powerful opponents and finding creative new ways to use existing law to protect investors and workers." But Spitzer's approach departs from prior NY prosecutors Giuliani and Thomas Dewey¹ in three ways:

1. Over-simplistic: Spitzer's aim is both selective and illogical. As if he'd polled to assemble an anecdotal compilation of a Walter Mitty electorate's Boogie Man, the Attorney General focuses on big business. No one doubts that some businessmen are frauds and some companies corrupt. But Spitzer's approach -- earning the sobriquet "the sheriff of Wall Street" -- borders on criminalizing business because it's big, not because it broke the law.
   
   Last fall, for example, Spitzer launched a civil complaint against major insurance companies such as Marsh & McLennan alleging pervasive fleecing of big-company clients. Though he found some criminal conduct by individual executives, the principal evidence in Spitzer's civil case was this--insurance rates were up:

   Though Spitzer did not offer any explanation of why brutally price-conscious companies like Microsoft would allow themselves to be overcharged, the media were sufficiently intrigued by the concept of rigged markets and turned the story into major news. . . What wasn't addressed was how insurance brokers such as Marsh & McLennan had acquired the power to put the squeeze on the Wal-Marts of the world, and were able to trick them into "paying too much for their insurance."
   
   Reasoned analysis suggested that there was an unseen aspect to the story, and one that Spitzer and the mainstream media missed. To begin with, over the last several years corporate risk relating to terrorism and, yes, overzealous regulators and lawmakers has made companies even more vigilant about protecting themselves. . . .
   
   Also, those out to besmirch the insurance industry did not factor in what it would cost corporations and shareholders to bring insurance expertise in-house. Even if one were to believe the suspect assertion that corporate premiums were artificially high, it would still have to be explained how Intel or Cisco could assess their insurance needs better and more cheaply than Marsh & McLennan, Aon, or the Willis Group.

   In May 2004, Spitzer:

   filed a lawsuit against former New York Stock Exchange Chairman Richard Grasso and the exchange Monday, seeking the return of some of Grasso's $187 million pay package. . .
   
   "You can't pay the head of a not-for-profit that much money," Spitzer said at an afternoon news conference. "The amount paid, close to $200 million, was simply not reasonable."

   Since when is salary setting criminal? asks technology lawyer Jonathan Wilson:

   Spitzer is not accusing Langone of committing any crime and if Spitzer succeeds Langone will not go to jail or pay any fine to the State of New York. Rather, any recovery against Langone would be paid to the NYSE, a not-for-profit corporation certainly, but one that also has the wherewithall to litigate its own claims.

   Spitzer also claimed the NYSE's board was misled about Grasso's pay. But the Board said no, insisting the process was fair. As a result, says Patrick at the anti-Eliot Spitzer Watch blog:

   Spitzer never has even addressed the fact that it seems so farfetched that anyone seen as "worthy" of a seat on the New York Stock Exchange's board is probably not going to be just tricked into approving of a compensation package that goes against their interest as a equity holder in the NYSE.

   Even were there trickery, why is the Attorney General, as opposed to fraud victims, devoting substantial taxpayer resources to a civil suit--especially given that NYSE's Board, the alleged victims, have ample resources to vindicate any wrongs?
   
   Lastly, in September 2003, Spitzer announced the discovery of "widespread" fraud by mutual funds, potentially bilking "billions" from shareholders. But the targeted practice was neither illegal nor concealed, confirms law prof/blogger Stephen Bainbridge writing at TechCentral:

   [T]he highly competitive mutual fund industry offers a wide range of fund options, ranging from low fee index funds sold directly to investors to high fee actively managed funds sold through brokers. Every fund fully discloses its fees in its prospectus. Alliance Capital's investors knowingly and voluntarily agreed to pay those fees when they invested with it. They simply were not ripped off.

   Expensive insurance rates, eight-figure salaries, and fine print are unfortunate, potentially bad bargains, and the responsibility of highly sophisticated hedge-fund investors. But not illegal. And, with some exceptions, claims of civil fraud are not the Attorney General's job. Still, when the target is big business -- like oil companies in last month's gas price tongue-lashing -- Eliot's blovating is both noteworthy and popular.



2. Prosecution by press: Eliot Spitzer gets convictions. Still, many of his most famous accusations remain unproved. Rather than pitching judge and jury Spitzer, "who is temperamentally unable to stay out of the headlines for more than 72 hours," indicts via media:

   Spitzer doesn't like taking cases to trial. Instead, he has devised a more powerful tactic: He exploits the threat of stock declines and business losses to force industries to change.

   Says the Wall Street Journal, "The Attorney General has become famous for assailing a business practice that is either controversial or legally ambiguous, and then using leaks via the media and the threat of indictment or the destruction of an entire company to force his targets to surrender." As a result:

   Few of Spitzer's high-profile cases have gone to trial. Few of his targets have gone to jail. Instead, companies have preferred to fork over billions in out-of-court settlements: All told, Spitzer's office collected $1.3 billion in penalties, fees, and tobacco money in 2002, $1.74 billion in 2003.

   Writing in the WSJ, Cato's Alan Reynolds recounts Spitzer's strategy in the insurance broker investigation:

   As in previous Spitzer cases, this one began with a press release citing snippets from one company's e-mails. The initial target is Marsh & McLennan, owner of the world's largest insurance brokerage. And as with previous Spitzer press releases, the media dutifully described the New York AG's unproven charges against a few as industry-wide "scandal." CBS Marketwatch spoke of contingent commissions being "at the center of a growing scandal in the insurance industry." There's no crime named "scandal," so presumptions of innocence can be dispensed with. The press release was titled "Investigation Reveals Widespread Corruption in Insurance Industry," but "corruption" is just another smear word like "scandal."

   As a public service to potential voters, Spitzer's opening statement in the Marsh & McLennan case ("Investigation Reveals Widespread Corruption in Insurance Industry") also was released En español, Russian and Chinese.
   
   The business community says Spitzer's overzealous and unethical; a self-promoter:

   Ernie Csiszar, president and chief executive officer of the Property Casualty Insurers Association of America, said Spitzer is unfairly using the threat of jail and a "trial by media" against business executives and that Spitzer's avowed political ambitions taint his prosecutorial positions.
   
   "The reality is that Spitzer did find practices in the industry that are deplorable; bid-rigging is the classic example," Csiszar said. "The problem that we have, that I have personally and the PCI's position is, that Spitzer takes it much further than that. If you leave it to the prosecutorial charge, fine, you've got them, a criminal offense was uncovered by your investigation by all means charge people and get on with," Csiszar said at an insurance industry meeting of the American Association of Managing General Agents in Orlando, Fla. last week.
   
   "Instead what we are seeing is a trial by media, a media that is only too happy to give Spitzer his podium; and an industry that basically left itself defenseless over the years.

   Spitzer's scored in other industries, as Matthew Continetti recounts in the March 7th Weekly Standard:

   When Spitzer announced on April 8, 2002, that he had discovered "a shocking betrayal of trust by one of Wall Street's most trusted names," Merrill Lynch's stock lost around $5 billion in value in a matter of days. By May 21, the company had agreed to settle with Spitzer out of court.

   Prosecutors aren't supposed to prefer the 4th Estate over the 3rd branch of government, writes William Holstein in the Wall Street Journal:

   Reflecting their dismay at the high-handed conduct of King George, the Founding Fathers created a judicial system with a stringent set of procedural safeguards to protect against overzealous or arbitrary prosecution. Yet in the atmosphere that Mr. Spitzer has helped create, the presumption is that CEOs are guilty--if Eliot Spitzer says they're guilty. . .
   
   Mr. Spitzer reportedly threatened a criminal indictment, which in effect would have put AIG out of business. Then he went on television to pronounce that the AIG transactions were "wrong" and "illegal," which some legal scholars say is unusual. It's not yet clear what the charges are. Nor has Mr. Spitzer heard Mr. Greenberg's side of the story.
   
   So the New York attorney general both charges and convicts in the court of public opinion. This pattern of overcriminalization is of deep concern to many chief executives. The proper process is for judges or juries to convict defendants only after convincing themselves that a charge has been proven "beyond a reasonable doubt."

   Spitzer's approach certainly justifies Time's 2002 recognition as “Crusader of the Year”.² But is Eliot's crusade -- and his techniques -- commendable? Especially now that he's campaigning for Governor:

   Do all the financial services firms Spitzer has hounded as attorney general get on board and pony up money, worried that there'll be hell to pay if they don't? (Or at least to try to buy themselves some much-needed goodwill?).

   Good question. Can you say "conflict of interest?"



3. Trampling Federalism: The Constitution establishes a Federal legal system, where Washington's powers are, on the one hand, narrow but, on the other hand, superior to and binding on the States. The relevant authority here is the "commerce clause" (Art. I, Section 8, cl. 3), which the Supreme Court said:

   was not merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States. In short, the Commerce Clause even without implementing legislation by Congress is a limitation upon the power of the States.

   Freeman v. Hewit, 329 U.S. 249, 252 (1946). Based on that authority, Congress established several Executive Branch offices and independent agencies to oversee particularized commercial, financial and consumer-protection sectors of the economy, including the Security and Exchange Commission, the Federal Trade Commission, the Food and Drug Administration, the Comptroller of the Currency, etc. Under Congressional guidelines in the relevant statutes, and with accumulated technical and/or economic know-how, the Supreme Court directed courts to defer to those that routinely weigh conflicting claims and choose appropriate policy:

   [T]hose with great expertise and charged with responsibility for administering the provision would be in a better position to do so. . . Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges' personal policy preferences. In contrast, an agency to which Congress has delegated policymaking responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration's views of wise policy to inform its judgments.

   Attorney General Spitzer apparently missed that law school lecture. Instead, he makes a practice of poaching on Federal agency jurisdiction, in cases including ignoring a pending FTC investigation to target computer spyware and spammers, suing to stop the sale of certain home appliances specifically authorized by the Department of Energy and pursuing a former bank employee "already acquitted on 29 of 34 criminal charges relating to alleged improper trading of mutual funds and who had settled related civil charges with the Securities and Exchange Commission." Spitzer's state-level efforts actually can interfere with on-going Federal investigations.
   
   Reviewing Spitzer's mutual fund case, Professor Bainbridge concluded:

   Spitzer has no statutory or regulatory power over mutual funds fees. He simply isn't entitled to decide whether Alliance Capital's fees were too high or not. As such, his oft-stated plan to require fee reductions as part of any settlements he reaches with fund companies is a gross abuse of prosecutorial power. . .
   
   If mutual fund fees are to be regulated, it should be done through formal SEC action rather than ad hoc litigation settlements. As, Mike O'Sullivan's Corp Law Blog observed, SEC rulemaking is subject to a number of constraints: "The SEC cannot adopt rules without first notifying the public of its intended rule, accepting and evaluating comments, publishing a final rule and waiting a certain period of time following publication before it can enforce the new rule." In contrast, no such constraints limit Spitzer's use of his prosecutorial power. He is accountable to no one, except New York voters

   Put differently, Spitzer is the Attorney General version of the liberal living Constitution, "Unquestioned by a media that live off his news leaks, and unchallenged by businesses afraid of retribution, Mr. Spitzer has expanded his power to usurp the legitimate roles of elected officials and federal regulators."

The good news: On October 12th, Spitzer suffered "his biggest setback since turning his attention to Wall Street more than four years ago." Specifically, Judge Stein of the Southern District of New York issued two opinions (the second addresses a related issue beyond this analysis) barring Spitzer from investigating certain Federally charted banks regulated by the Treasury Department's Office of the Comptroller of the Currency. That agency regulates national banks; the OCC's mission includes monitoring potential racial discrimination in consumer real estate lending.

Federal law (12 U.S.C. § 484, the successor to similar languge in the 1864 National Bank Act) confines federal bank oversight and review (called "visitation") to the OCC: "No national bank shall be subject to any visitorial powers except as authorized by Federal law." Heedless of Federalism expressed in the plain language of Congress (and of the expert agency), Spitzer launched his own investigation into real estate lending, seeking data from both state- and Federally-chartered banks. And based in part on the OCC's publicly available summary analysis, Spitzer claimed to have confirmed that lending practices of national banks in New York were racially motivated and thus unlawfully discriminatory. Sound familiar?--New York's Attorney General unilaterateraly invading Federal jurisdiction? The OCC, and the targeted banks, went to Federal court to halt Spitzer's investigation.

Spitzer's syllogism is flatly wrong,³ but even were it not, New York's Attorney General lacks any authority to investigate national banks. In a 39-page opinion in OCC v. Spitzer, 05 Civ. 5636 (S.D.N.Y. Oct. 12, 2005), Judge Sidney Stein "hammered Eliot Spitzer," deferring instead to the OCC's analysis of the scope of the statute (Slip Op. at 17):

Nothing in the text of section 484 or the surrounding provisions indicates that Congress intended the courts of justice exception to preserve the ability of states to enforce laws regulating national banks’ activities by instituting judicial proceedings. The statute therefore neither unambiguously requires that the general law enforcement officials of states be permitted to enforce state laws regulating the business of banking, nor unambiguously permits states to bring judicial actions to enforce such laws.

Commending the agency "for stopping this power grab dead in its tracks," the Wall Street Journal summarized:

Judge Stein permanently barred Mr. Spitzer from subpoenaing documents from, or bringing enforcement actions against, national banks with regard to his lending probe. This was an absolute victory for the Office of the Comptroller of the Currency -- the federal body charged with regulating national banks -- as well as the Clearing House Association, a commercial banking group. Both bodies had filed lawsuits arguing Mr. Spitzer was meddling in matters over which he had zero jurisdiction, and Judge Stein wholeheartedly agreed.

What makes the ruling particularly satisfying is that, in addition to upholding good law, it puts an end to one of the uglier campaigns Mr. Spitzer has waged in pursuit of political gain. The New York AG this year declared he was probing whether national banks had engaged in discriminatory lending practices to "vulnerable groups" of New Yorkers. This is code for racial minorities, whose votes Mr. Spitzer is trying to woo in his current gubernatorial bid.

Score one for the rule of law; another for Federalism.

Conclusion: Spitzer's loss won't alter his attitude or change his chances to be Governor. But it should. Spitzer's bright, educated, successful--and as ambitious and deceitful as Marcus Junius Brutus. New York voters should remember that both on the Ides of March and next November.
__________________

¹ Dewey was New York's "racketbuster" in the 30s, a two-term governor in the 40s, then lost Presidential races in 1944 and 1948 as the Republican nominee.

² Focused on "whether his unique interpretation [of his authority and mission] could somehow benefit Democrats," as opposed "whether Spitzer was applying the law," the MSM worships Spitzer:

Last summer an article in Legal Affairs compared Spitzer to King Arthur. Last December an illustration on the front page of the New York Times's Sunday business section portrayed Spitzer as Superman. Last October the Atlantic Monthly's Sridhar Pappu wrote that "to hear Spitzer speak about his job, about what it has become, about what he's made it, is like sitting down with Bruce Wayne, Batman's alter ego, and asking him why he dresses like a bat and lurks in the corners of Gotham each night."

Even the conservative New York Sun called Spitzer "the worst nightmare of every flimflam artist in high finance."

³ This logic reflects the widespread but erroneous belief that racially-correlated variations in interest rates reflect racial discrimination, ignoring the fact that interest rates are set both to recover the cost of capital as well as to reflect risk of default:

A cursory glance will undoubtedly show that a significant number of subprime loans went to minorities, a fact critics will point to as proof that banks are charging blacks or Hispanics more for their loans than whites. Yet it is more likely that most of those minorities had the sort of credit records that merited higher prices, and that without risk-based pricing they never would have received a mortgage in the first place.

This post also is available at Blogger News Network.