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Inside Eliot’s Army

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Spitzer’s office wasn’t always viewed with fear. But then, for years, it hadn’t shown its power or really even known it had such power. For Spitzer, the Merrill Lynch investigation in 2002 had been his proving ground. Many on Wall Street knew that research analysts at investment banks sometimes offered one opinion of a stock privately and a very different one for public consumption. At the time, the federal Securities and Exchange Commission let it be known it considered Spitzer “a rabid dog who cared about nothing but publicity,” as one observer said. But as Spitzer’s office teed up Merrill Lynch, the world’s largest securities firm, some wondered if an unpopular politician could afford to take on an engine of the state’s economy. Spitzer may have, as some say, a free-swinging “moral aptitude.” When the research analysts’ double standard came to his attention, he said, as one observer put it, “How can we let them publish lies?” Niftily, the politics worked. Says Darren Dopp, Spitzer’s communications director, “It was clear we’d have millions of supporters.”

On a Friday, Spitzer recalls, he received a warning from a Merrill lawyer: “Be careful, we have powerful friends.” Spitzer didn’t take that as a threat. “I don’t think he’s the person to mean it that way,” says Spitzer. “What he was really saying was, ‘Do you realize who you’re going up against? I don’t think you really have the capacity to do this.’ ”

It was a fair assessment. Spitzer had been unable to rally others to his cause. The SEC had taken a peek at research analysts and wanted no part. Later Spitzer would say he had “complete and utter disdain” for Harvey Pitt, the SEC chair at the time. At that moment, though, Pitt’s back of the hand didn’t build confidence. “We wondered,” recalled one close associate, “is this the biggest mistake of our lives? What are we getting into?”

Spitzer can be a gracious host; perhaps it is his preferred mode. If attacked, he responds belligerently, especially if an attack aims, as Brown put it, at “his determination or his manhood.” Once, in a heated argument with California’s attorney general, Spitzer said, “You want to step outside? That’s fine. I grew up in the Bronx.” (He was raised in upscale Riverdale—technically in the Bronx.)

“What choice did I have [in the Merrill case]?” Spitzer reflects. “Either I go home, or I say, ‘You think you can intimidate me? Screw you. Choose your weapon.’ ”

Perhaps it is true, as defense attorneys now say, that Spitzer understands business as few other prosecutors do, by which they mean he knows its pressure points. Three days after the warning, he filed suit against Merrill. He declared his weapon, saying, in effect, “I got the Martin Act. What do you got?” The sweeping powers of the Martin Act—“It is one of the broadest anti-fraud statutes ever devised, at least in a democratic society,” says a prosecutor—had by gentleman’s agreement been wielded almost exclusively against boiler rooms: fly-by-night firms that took advantage of unsophisticated consumers.

Spitzer decided to use it against Merrill. He moved unilaterally, seeking an injunction against Merrill. As part of his filing, Spitzer opened a second front. He released e-mails that showed how callously, almost gleefully, Merrill’s analysts had been deceiving the public. Analyst Henry Blodget recommended the public buy InfoSpace while privately labeling it “a piece of junk.”

Merrill’s lawyers were furious. “Apoplectic,” Spitzer recalls.

“Screw you,” thought Spitzer. “Don’t talk to me about playing fair when you’ve been screwing investors for all these years.”

Merrill called Spitzer’s allegations baseless, and promised, “We will defend ourselves vigorously.” Merrill’s stock, though, took a beating; eventually, it would lose $12 billion in market capitalization. Two weeks later, the company apologized to shareholders.

“That was the moment our credibility exploded exponentially,” says Spitzer. “We had been David, and we had slain Goliath.”

The Merrill suit demonstrated Spitzer’s nerve, his “gall,” as detractors put it. It also alerted Spitzer to what would become among his most formidable weapons: publicity. As one Spitzer adviser says, “Shame is an incredible tool in public policy.” Businesses tend to think that Spitzer seeds the press with leaks. But his publicity strategy is much more brazen. He seems to have cannily reinvented the press as investigative partner. He invites reporters to press conferences at which compromising e-mails are handed out.

“When you really have the goods,” says Brown, “a company is subject to devastating pressure.” Companies complain that the quality of the goods is irrelevant. By simply making public allegations, Spitzer creates unbearable pressure, they say. As Jim McCarthy, publicist for Spitzer target Kenneth Langone, says, “The bad press becomes a tommy gun.” In this atmosphere, says one defense attorney, “you can’t advance arguments.”

And so, though a company might spoil for a fight, attorneys counsel against it. “You think you can withstand the first volley while you prepare for a trial?” says one attorney. “Your stock price will drop 40 percent and your key people will leave. You will not have a company left when the trial comes.”

What most disturbs defense attorneys, though, is something else. They might concede their clients’ missteps. People—good people—sometimes make expedient choices. Hadn’t Spitzer once been expedient in obscuring the source of campaign funds?

But Spitzer, they contend, turns differences of opinion into moral judgments. Says McCarthy, “Anybody who dares disagree with him is not only wrong but a moral villain.”


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