On March 30, 2004, David D. Brown IV, who runs the state attorney general’s Investment Protection Bureau, fished the mail out of his in-box at his Albany office. One letter caught his eye. It was addressed in blocky handwriting to his boss, New York Attorney General Eliot Spitzer. Postmarked Westchester, without a return address, it had the feel, Brown thought, of an anthrax letter. (Fortunately, it was already open.)
At that moment, Brown, 46, was in the midst of settling cases in the mutual-fund investigation he’d led for Spitzer, the largest probe into the $7 trillion industry in 60 years. In settlement negotiations, Brown tended to have the upper hand. “Tell them it’s $25 million more if they don’t settle today,” he relayed to one company, “and Monday it goes up $50 million.”
At the same time, Spitzer put a bug in his ear. “What’s next?” he badgered.
Lately the attorney general’s office had been receiving lots of tips. The one Brown was currently considering came in the form of two single-spaced, typewritten pages. It was signed “Concerned.” One line jumped out.
“The point is to appear as if Marsh is providing a service to the insurance market rather than the reality which is that Marsh is receiving major income for directing business to preferred providers/insurance markets,” it said.
The letter made a stunning allegation against the world’s largest insurance broker, Marsh & McLennan. It charged that in its commercial insurance, the broker took two payments. First, it got a commission from its customers, the businesses it represented that were seeking insurance. Then, it took undisclosed payments from the insurance companies that wrote the policies.
Brown is a Harvard Law School grad—he and Spitzer were classmates there—with a talent for boiling things down. “Rotten,” he thought. From early on, that second undisclosed payment looked to Brown like a kickback.
Brown faxed the anonymous letter to Spitzer.
“If this is true,” Spitzer told Brown by phone, “this is amazing. I want them”—the company’s representatives—“in here now.”
“Eliot,” says David Brown, “lends speed and violence to this process that you wouldn’t believe.”
Three days later, Brown sent out a broad subpoena to Marsh. He tracked Marsh’s general counsel, William Rosoff, to Asia, where he was traveling on business. Within a week, Rosoff appeared at the attorney general’s office in Manhattan. Says Brown, “Eliot is an extremely impatient man, to put it mildly.”
No one expected great things from Eliot Spitzer when he was elected in 1998—his margin of victory was only 25,000 votes—over incumbent Dennis Vacco. The New York Times had held its nose while endorsing him as the least bad of “two flawed candidates.” Initially, Spitzer seemed to fudge the source of his campaign money, much of which came from his family. He was viewed as a spoiled rich kid whose latest entitlement was statewide office, albeit one that historically had minimal power. (Fortunately for Spitzer, Vacco was “an even worse choice,” said the Times.)
But in the six years he’s been attorney general, Spitzer has transformed the office, “detonating,” as one observer put it, several of the country’s most significant industries in the process. He’s beaten the mutual-fund industry, the investment-banking industry, midwestern polluters, giant pharmaceutical companies; he’s had a run at gun manufacturers—his progressive agenda seems as broad as any governor’s. “Eliot,” says one admirer, “knows no limits.”
Spitzer has transformed his own political future. Perhaps, as some now say, a run for governor has always been in the cards for the ambitious Spitzer. The offhanded announcement of his candidacy last month—he initiated it by phoning a few reporters—seemed to indicate as much. It was, for instance, unadorned with such niceties as a gubernatorial program. Indeed, the independently wealthy Spitzer, the stiff-backed, virtuous, sometimes vengeful “plutocrat populist,” as friends would have it, seemed to feel it was enough, at this point, to offer a few perfunctory comments (accountability was a central theme) and his résumé. So did some admirers, who started to call him Governor.
Businesspeople, defense attorneys, and, lately, insurance men see an entirely different character. Spitzer, they say, has turned prosecutions into power showdowns and personal drubbings. “Authoritarian, liberal egomaniac,” says one businessman. Even his lawyer friends discreetly remove their names from fund-raisers so as not to enrage corporate clients.
In person, Eliot Spitzer doesn’t immediately come across as the sort to inflict a drubbing, personal or otherwise. Spitzer is balding on top—the central strip looks like a crop that won’t quite take. His ears pop out. In conversation, he is commanding, rambling, impatient (“Let me make your point for you”), self-deprecating, often on the point of impatience (“I do occasionally listen”), and nerdy. Perhaps it’s words like injurious that pepper his speech that give him the eggheady allure. Plus, Spitzer has those geeky intellectual reflexes. A person who explained the cleverness of Star Wars to Spitzer recalls him responding, “Like Fenimore Cooper.”
Then there is also Spitzer’s apparent shyness about the personal. These days, politicians, like talk-show hosts, are supposed to connect with audiences through shared emotion. Perhaps Spitzer’s biography doesn’t give him a leg up with the common man. Born to wealth—his father made a fortune in real estate—he attended Horace Mann, Princeton, Harvard. Nor does he seem comfortable dwelling on such political staples as his religion (he’s Jewish, his wife is Christian) or his family (he has three daughters). “I’m not good at my own psychoanalysis,” he says.
What Spitzer would like you to believe he’s good at, and comfortable with, are the facts—colorless, irrefutable. It’s a theme he can’t stay away from. “[It’s] the underlying facts that drive each of the major cases,” he says one day in his office. They’re like happy memories; effortlessly, he summons up facts from even distant cases. For Spitzer, law, not religion, not family, is “the civilizing force,” the source of fairness and accountability, his emerging gubernatorial themes. And underpinning the law are a few impartial, unemotional, and resilient facts.
Clearly, though, facts serve for Spitzer as a gateway, not merely to justice but also to anger, especially the righteous strain that so infuriates his critics. Even seated in his office, legs crossed in his pin-striped suit—an aide once tried unsuccessfully to get him in a flannel shirt—you can feel the engine rev. Rosoff, just the name, adds fuel. Indeed, the insurance investigation begun with the letter to Brown offers perhaps the fullest glimpse at how the man who may soon be the state’s highest elected official wields power. In it, he is at full throttle, “righting the wrong,” as he would say; at the same time, he is restructuring industries, aggressively, personally, mercilessly. And, as Brown would add, impatiently.
When Marsh & McLennan’s Rosoff appeared in Brown’s office, Brown showed him to a conference room where, he sometimes says, “we make them sweat.” Rosoff didn’t sweat. Rosoff knew Brown. He’d been a partner at Davis Polk & Wardwell when Brown was an associate there. Rosoff wondered why this had to be handled with a messy subpoena. Then he coolly assured Brown he was all over the situation. “There’s a Chinese wall,” he told Brown. “We make sure the brokers who place the insurance never know about the commissions [from insurers].” Rosoff suggested that though Marsh did indeed take the added money, there was no harm in it, since the customers were still getting the best deal.
“That turned out to be complete nonsense,” says Brown.
Seven months later, a fiery, fed-up Spitzer seemed ready to put Marsh & McLennan out of business.
“Eliot,” as Brown explains, “lends speed and violence to this process that you wouldn’t believe.”
Spitzer didn’t buy Rosoff’s declarations. They flew in the face of the facts and were “crumbling one by one,” says Spitzer. As he reflects on this, the famous Spitzer chin lurches forward, the bottom teeth advance. He is angry with an anger that accuses not only of bad judgments but, as defense attorneys complain, of moral transgressions.
Spitzer, impelled, it seems, by a sense of betrayal, decided that Rosoff and his boss, Marsh CEO Jeffrey Greenberg, one of the most powerful people in the insurance business, had to go. Spitzer didn’t tell many of even his closest circle about this decision. Most, when they learned, would be against it. “Nobody [in the office] wanted me to do it,” acknowledges Spitzer. It was an extraordinarily aggressive move. Who, after all, was Spitzer to impose personnel decisions on a public company? That’s for shareholders and the board of directors. In his office, Spitzer recalls, “It was another one of those moments where I took a deep breath and said, ‘We’ll see how this plays out.’ ”
He’d tell Marsh, “If your company wants a settlement that permits survival, a threshold demonstration of reform means transition to new leadership.” In legalistic talk of thresholds and transitions, Spitzer lent violence to the process. He demanded heads on a spike.
For a certain type of lawyer, there’s nothing better than to be a soldier in Eliot’s army. That wasn’t always the case. “Moribund” was how one described the office they inherited. Spitzer sought talented and, as he put it, “ideologically motivated” lawyers. “The recruiting effort was very hard,” says Spitzer. “I was trying to sell a product that was highly ambiguous to people who were highly skilled.” It seemed a measure of his desperation that Spitzer went so far as to apologize to one top prospect for a ten-year-old turf war he’d caused. Apologizing isn’t something he enjoys. “I’m never going to apologize to you again,” he added.
Soon Spitzer had assembled a small, highly skilled, extremely ambitious army—“a Delta Force,” Brown says—and one whose members sometimes, wackily, sound like Peace Corps volunteers. Says Brown, “Eliot has smart people thinking, in a predatory way, Where can we do good?”
They quickly expanded the office’s scope, taking in areas everyone assumed to be the purview of others. Like insurance. There is a state insurance commission that by statute rides herd on the likes of Marsh & McLennan. “Supine,” says one of Spitzer’s lawyers. The state commission had looked at the Marsh matter a couple of years ago. As far as anyone knew, it was still looking.
Next, they reinvigorated moldy legal weapons, hundred-year-old statutes that gave them broad—in some cases, previously unimagined—legal powers.
David Brown is, in certain ways, typical of the Spitzer army. For almost two decades, he’d worked at the esteemed corporate law firm Davis Polk, then at Bankers Trust, and most recently at Goldman Sachs. When describing the satisfactions of their work, elite New York lawyers invariably refer to its intellectual challenges. They don’t need to mention the financial rewards, not inconsequential if, like Brown, you have four children to put through college. Brown often found the work intoxicating and earned close to $500,000 a year. He was also consumed. He checked his voice-mail every hour, and mostly played defense, careful not to do anything precipitous. “I was Mr. Extension and Delay,” says Brown.
None of which struck Brown, who’d helped run a prison legal-assistance project in law school, as particularly worthy. Upon graduation, he’d had a chance to be a public defender, but chose Davis Polk. “I could do this for a few years, then be free financially,” he’d thought. (Harvard Law classmate Spitzer worked at Paul, Weiss.)
“I was a corporate dweeb,” Brown concludes—a depressing thought. He found himself wondering how he’d grown so dedicated to the proposition that his children should lead upper-middle-class lives. “I had totally sold out,” thought Brown. Brown, five-eight, with light-brown hair and light-blue eyes, favors dark suits, billowy white shirts, rimless glasses, and, at Goldman, a classic comb-over—he could be a figure from the fifties. For years, he’d toyed with jumping ship, doing something that would, as he said, make a difference. “I was pining for it,” he says, “but I was afraid that I wouldn’t find it satisfying, and so I’d be poor and unhappy instead of rich and maybe unhappy.”
September 11, 2001, proved a turning point. “I could have died” was one thought. A year and a half later, Brown buzz-cut his hair and crisply walked, as he occasionally thought of it, to the other side. He joined Spitzer’s office, for $92,000 a year, an 80 percent pay cut. “Don’t you miss the money?” he asked his wife, an independent filmmaker, who assured him she didn’t.
Suddenly, in middle age, Brown felt newly consequential. “It’s extraordinary how much power is concentrated in Eliot and in me,” says Brown. To start, he had subpoena power. “All I have to do is type one up,” he says, which he’d quickly done for Marsh & McLennan, and the other large brokers, Aon and Willis.
In April, his team began interviewing personnel in Marsh’s global-brokerage unit, which administered the back-end commissions from insurance companies. He subpoenaed their e-mails. “E-mails are,” as one Spitzer prosecutor explained, “the functional equivalent of eavesdropping.”
Boxes of e-mails started coming his way, which provoked in Brown a virile new feeling. “This is the kind of thing you dream about doing as a lawyer,” he thought. “Finding the dirt.” He also thought, “I’m happy,” and seemed surprised.
“Spitzer’s office terrorizes the defense bar,” says one defense attorney. For six years, Spitzer worked at the Manhattan district attorney’s office, and his inner circle is composed almost entirely of former criminal prosecutors—lawyers who’d pursued corrupt cops, mobsters, even terrorists. Their outlook set the tone in the office, which to attorneys defending corporations was not a felicitous turn of events. These lawyers hadn’t been in business. They “spouted strange, far-fetched theories,” says one attorney, characterized by “extreme thinking,” as if they thought the “unfathomably complicated insurance business” was a simple mob shakedown.
In this, Brown stood apart. He was a financial insider. (In fact, Brown heard he’d nearly been passed over for head of Investment Protection because he hadn’t been a prosecutor.) Brown acknowledged another difference. “I’m more of an impressionable humanist,” he says. “I can get swayed by people looking into my eye. I want to believe the best.”
When, in that first meeting, Rosoff urged a consideration of the rich history of the insurance business and the complex evolution of certain arrangements, Brown considered the advice. He couldn’t imagine someone of Rosoff’s stature lying. Perhaps, he thought, there was something he didn’t understand. “Maybe,” he reflected, “this is a tempest in a teapot.” Still, he wondered, “Where else does a fiduciary get paid by customers and suppliers?” Fiduciaries are legally supposed to act in the best interests of their clients.
Brown added new lawyers and brought in law students to pore through the boxes of e-mails. Each time a legal intern found a “hot doc,” there was an ecstatic end-zone dance. Despite Rosoff’s assurances, by early summer the e-mails suggested that Marsh’s brokers steered business to particular insurers, not to serve the client who purchased the insurance but to earn bonuses negotiated with the insurers. Which insurer got the business was dictated, as one hot doc revealed, by “who [we] are steering business to and who we are steering business from.”Brown, who seemed to carry with him a sense of good corporate citizenship, was appalled and also deflated. “These guys are so smart and so dumb,” he thought.
Spitzer’s criminal-prosecutor types—Brown kept them in the loop—didn’t experience the same disappointment. But then, they started with a simpler set of assumptions. As one put it, “You can count on human greed.” Yes, the insurance industry employed an unusual vocabulary, but, as was becoming evident, their aim wasn’t very complicated. “This [insurance] case is about betrayal,” said one prosecutor type, “lying to separate people from their money.”
To defense attorneys, there were always nuanced explanations—“I can take every one of those actions and give an impassioned explanation of why they acted in good faith,” protested one attorney. Which was, perhaps, what Rosoff was attempting. Unfortunately, none of his explanations seemed to pan out.
Brown, molded by Spitzer, impatiently turned up the heat.
One attorney responded to a Brown request with a question: “Is this the attorney general’s usual hair-on-fire speed?”
“What choice did I have?” Spitzer asks. “Either I go home, or I say, ‘You think you can intimidate me? Screw you. Choose your weapon.’ ”
“Yes,” responded the office of the former Mr. Extension and Delay.
Defense counsel could resist, or try to. “The downside of not doing it our way is pain,” says Brown. One defense attorney complained that Spitzer’s prosecutors—he referred to the criminal side—threatened to pick up a hesitant client at the Larchmont train station or, better yet, at his office in handcuffs. The more encompassing danger of resistance, though, was that, as one defense attorney explains, “Spitzer’s office assigns people a white hat or a black hat early on.” White hats go to those who are open, honest, and don’t delay. “You do not want to be assigned a black hat,” says the attorney. “They prosecute the black hats.”
Clearly, Marsh & McLennan was fitted for a black hat early on. When Brown asked how Marsh justified those back-end commissions paid by insurers, Marsh claimed it provided a bunch of administrative services to insurers. So Brown summoned insurers. They told a different story. “It was pay-to-play,” one exec told Brown. “If we don’t pay, we don’t get a seat.”
“You never want to tell Spitzer to go fuck himself,” said one close observer, which is, in effect, what Marsh seemed to be doing by not coming clean. As Spitzer would later say, “I don’t know why Marsh reacted the way it did. It will go down as a case study of how not to handle an investigation.”Spitzer likes to say that his office is called to action by wrongdoing. He dislikes the verbs police and intervene, sometimes used to describe what he does. Spitzer wants to suggest that the attorney general is a referee, observing from the sidelines until a foul forces him to get involved.
It would be silly, though, to think of Spitzer as an impartial sideline arbiter. Few attorneys general have been so willing to affirmatively intervene. Indeed, as one close associate explains, “Eliot thinks it’s a crazy distinction between prosecutor and regulator,” which is not how the game was ever played before. Spitzer, though, is clearly more interested in systemic change than in carting off a few wrongdoers. In fact, Spitzer’s troops have become more than regulators. They’re reformers, even backdoor legislators, and proud of it. “It’s good to reform industries, and we’ve done a good job at it,” says Michele Hirshman, Spitzer’s first deputy. “We’ve filled a vacuum.”
If others shirk their duty, Spitzer’s troops will eagerly step in. “Before Eliot, the position was, ‘We’re lawyers for the state Department of Environmental Conservation.’ That’s no longer enough,” says Dietrich Snell, Spitzer’s No. 3. “Now it’s, ‘Let’s do it.’ If DEC wants to come along, fine. If we think the federal Environmental Protection Agency is not doing its job, we’re prepared to take it on.” After suing, Spitzer’s environmental bureau negotiated a reduction in pollution produced by midwestern power plants.
By midsummer, Brown had started to think of how to change the insurance business. As he explained, “We are investigating the insurance industry, learning about it and reforming it simultaneously.”
After looking at e-mails of Marsh & McLennan executives and learning they steered business to earn bonuses, Brown decided to drill down. He tweezed some specific deals out of the e-mail traffic. He’d trace them, beginning to end. Says Brown, “What cracked the case for us was to get all e-mails from specific deals.”
On September 9, Brown was on Amtrak, headed to Albany from Manhattan, when he got a message on his BlackBerry. “Just when you thought you’d seen it all,” it was titled. The attached document was from Munich-American RiskPartners, an insurer. It read, “This idea of ‘throwing the quote’ by quoting artificially high numbers in some predetermined arrangement for us to lose is repugnant to me …”
This hot doc suggested that rather than just steering a client to a particular insurer, Marsh & McLennan asked insurers to create fake bids. “This is the final, disgusting excrescence of fraud,” the fraud he’d been seeing all along, thought Brown.
Amtrak’s service to Albany travels along the Hudson, sometimes so close a passenger feels he’s riding on the water. Brown liked to get a seat with a view. Now, though, he buried his head in his BlackBerry, shooting the e-mail to others at the office and to Spitzer. He soon heard back. This wasn’t merely more of the same. “This is flat-out crime” was Spitzer’s thought. It was bid-rigging. By the time Brown’s train reached Albany, the investigation had changed.
Bid-rigging ushered in the criminal side of Spitzer’s office, his most aggressive lawyers, the people who, as Brown thought of it, took people away from their families. Peter Pope—the 46-year-old Yale Law School graduate and head of the criminal division—“is a hard-ass, capital H, capital A,” says one who works with him.
Brown had stoked the insurance investigation into a healthy blaze; Pope’s crew added gasoline.
Brown’s team had been organized by insurance brokerage, a group for the three largest brokers, Marsh & McLennan, Aon, and Willis, all of which were chugging along. The following day, September 10, it was reorganized. Brown’s lawyers teamed up with Pope’s lawyers. It was all Marsh, all the time now.
“We’re going to need somebody,” says Spitzer of his run for governor, “who can say, ‘Wait a minute: Here’s the problem, here are the facts, here are the value judgments.’ ”
Brown liked to send his lawyers to knock unannounced on witnesses’ doors. “We will come to your house at night the day we learn something,” says Brown. “We get raw, unfiltered, accurate information.” September 10, two lawyers headed to Florida to knock on the door of the sender of the “throwing the quote” e-mail. The witness wouldn’t let them in, so they stood on the porch, attacked by bugs, joined by the witness, who talked for two hours.
Pope, who’d prosecuted the mob when he was at the Manhattan district attorney’s office, soon understood that Marsh & McLennan was running an old-fashioned mob-style operation. The logic of the thing was clear. If an insurance broker is going to steer business to specified insurers, he’s got no choice. Clients want competing bids, so he’s got to concoct competing bids.
On September 14, an intern going through a box of e-mails related to insurance for the Greenville County, South Carolina, school district appeared in Brown’s office, quivering. He had an e-mail from a Marsh executive to insurer CNA, soliciting a phony bid. “I want to present a CNA program that is reasonably competitive, but will not be a winner,” it read. Marsh wanted another insurer, Zurich, to win the bid.
The attorney general’s office was moving at breakneck speed—“on adrenaline and caffeine,” Brown says. Three days later, on Friday, September 17, the “fictitious bids” subpoenas went to Marsh and also to insurers. One subpoena, sent from the criminal side, defined “fictitious bids,” then asked recipients to list “the fictitious bids” they had participated in. The deadline was a brisk two weeks.
The message was clear. As one prosecutor put it, “The jig is up.” The day of the deadline, American International Group, or AIG, and ACE, two giant insurance companies—in a strange twist, AIG is run by the father, ACE by the brother of Marsh & McLennan’s CEO—rushed into Spitzer’s office. They’d discovered bid-rigging, and they wanted to come in, eager to cooperate.
Marsh, it turned out, had a special vocabulary for its bid-rigging scheme. It referred to decoy quotes as “b quotes.” Marsh’s “game plan,” as one e-mail called it, was not easy to resist. Wrote one Marsh exec to insurer ACE, “We do not want to hear that you are not doing ‘b’ quotes or we will not bind”—sign up—“anything.” The threat was that ACE would get no more business from Marsh.
Insurers initially portrayed themselves as victims in a pay-to-play scheme. Lately, it wasn’t so clear. “One man’s extortion is another man’s bribe,” Brown came to realize. If insurers were going to pay—and they seemed resigned to it—they wanted more for their money. On April 15, 2002, Chubb offered to pay $1 million to Marsh for a “no shopping” policy for Chubb accounts. Under the unexecuted agreement, Marsh promised to renew Chubb customers. Chubb also wanted the business of the wealthy, an especially desirable line of insurance. This was Aon business. According to e-mails Brown saw, Chubb got angry when Aon showed Ivana Trump’s business to competitor AIG. So far, the insurance investigation has focused on the brokers. “A next phase will include insurers,” says Brown.
Eventually, Marsh followed AIG and ACE into Spitzer’s office to talk. But, as had become typical with the company, it dawdled. Rosoff showed up on October 12, by which time Brown had just about finished writing the complaint against the company. A press conference was set for two days later. And anyhow, Rosoff sounded the same patronizing theme: You have to understand the rich history of our business, which, Brown had by now decided, “is a scoundrelly argument, code for ‘We haven’t been regulated.’ ” Again Rosoff urged Brown, “You don’t understand our business. Don’t misinterpret. Please. Please.”
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.”
There was still a chance to settle with Marsh & McLennan, announce the problem and the solution at the same time, rather than file charges, but, as Brown saw it, not much. “I’m not seeing any kind of recognition that they have a massive problem,” said Brown. If there was to be a settlement, it seemed, Spitzer would have to wring it out of Marsh, just as he’d forced it on Merrill. “Marsh,” Brown thought, “has no idea what’s about to hit it.”
There was another consideration. So many scandals crowded the business pages. “There has been, unfortunately, this lingering notion that, okay, mid-level people may go to jail, and fines will be paid, but that’s the shareholder money,” says Spitzer. “CEOs continue along.” Spitzer had done his part in permitting that notion to linger—no one in the research-analyst case went to jail; perhaps three mid-level people in the mutual-fund scandal will do time.
“If you believe in accountability,” says Spitzer, “then when you have the factual record to say, ‘Wait a minute, you [the top management] should be held accountable,’ you have to act that way.”
At his October 14 press conference, Spitzer announced the guilty pleas of two AIG execs in the bid-rigging scheme. He also announced he was suing Marsh & McLennan in civil court. Then he brought out the big gun. Spitzer made clear that he was considering a criminal charge against Marsh & McLennan, essentially treating the company as a criminal enterprise, something no business can survive. Unless, that is, Marsh’s top leadership stepped down.
To some, Spitzer seemed to relish a fight all the more once it became personal. “I guess so,” says Spitzer. Considering it, he adds, in his careful language, that as attorney general, “you begin to think of yourself as the public, and hence it becomes a bit more emotionally compelling.” Spitzer had sued Kenneth Langone, a member of the board of the New York Stock Exchange, for his role in approving a $187.5 million pay package for Richard Grasso, former head of the exchange. For six months, Spitzer had tried to settle the case. Still, once the fight turned bitter and personal—“Howard Dean without the charm” was just one of the names Langone’s press person called Spitzer—Spitzer seemed to get a taste for the fight. “I’m not going to be intimidated by the gutter behavior of Ken Langone,” says Spitzer. If that wasn’t enough, Spitzer, according to Newsweek, told a friend to tell Langone he intended “to put a spike through [his] heart.” The trial is pending.
Now he squared off with Marsh & McLennan CEO Jeffrey Greenberg, scion of the country’s most famous insurance family. Initially, Marsh seemed inclined to fight. Soon, though, Marsh’s stock lost 43 percent of its value. In eleven days, Greenberg was gone. Rosoff soon followed. The new CEO was Michael Cherkasky, who headed Kroll, an investigative agency recently purchased by Marsh. He’d never run an insurance agency of any size. But he had at least one appealing credential. He was Spitzer’s old boss at the Manhattan district attorney’s office and a political supporter—he’d contributed to Spitzer’s campaigns.
A few days after Cherkasky was installed, Spitzer indicated that he did not intend to indict Marsh. Soon, Cherkasky abolished the back-end commissions that had been at the center of so much trouble and that had accounted for half the company’s profits.
On Christmas Day, as Spitzer seemed on the verge of reforming yet another industry, the New York Times published a front-page story suggesting that the attorney general had decided to change course. He would, said the Times, “cede” major enforcement actions to federal authorities.
Spitzer was in North Carolina at the time, visiting his in-laws, and read the article online about 6:30 in the morning. Spitzer had acknowledged that, logically, he would rely more on a reinvigorated SEC in the future. But, he insists, “Hands down, we’ve got a better pipeline of cases than at any point in the past six years.” The most damaging part of the Times story, though, was its suggestion that he’d turned on a dime because he now needed campaign contributions from the Wall Street firms he’d terrorized. “That’s insane, that’s crazy,” says Spitzer.
“You’re talking about Spitzer’s legacy,” explained one of his aides. You’re also talking about his future. Critics said that a Governor Spitzer would be bad for business. (Marsh had laid off 3,000 employees.) Spitzer countered that he’d reform the industry, ferreting out the corrupt parts, and leave it more competitive. The Spitzer-as-reformer theme seemed perfectly timed. Reform was in. Albany, it’s widely agreed, is dysfunctional. His Delta Forces were onboard. “What if,” asked one, “state government was a force for good?” Throw in an absent Rudy and a weak Pataki, and the Spitzer candidacy had the feel of inevitability.
Now the Times characterized Spitzer as doing an about-face on reform, and for the basest reason: money. In Spitzer’s view, the article wasn’t merely wrong—in addition to everything else, he didn’t need that much money; Spitzer could put as much as $30 million of his own into the race. But, as Spitzer put it, it was “fundamentally injurious to what we’re doing, an anathema.” Dopp, the communications director, received Spitzer’s first phone call at 7 a.m., and never did sit down to Christmas dinner. Spitzer’s other top people were quickly rallied. Through the day, Dopp talked to the Times. Spitzer got 60 BlackBerry messages by 3 P.M. Eventually, Spitzer too called the Times. The next day, the Times ran an article retracting the story.
The full-court press had worked. Spitzer’s reputation remained unblemished, even before most noticed the taint. And yet Spitzer’s urgency exposed the fact that he had only one horse to ride in this race—his image of rectitude, the bullying do-gooder, the reformer who took on the big guys. Which leads, inevitably, to another question: Does the same skill set that makes a great prosecutor make a great governor? For someone who seems to constantly think about how industries must change, Spitzer seems to have given far less thought to how, to start with, he’d wrangle with an intractable legislature, where every problem starts in Albany. Quizzed, Spitzer sounds slightly off guard. Reflexively, he says he’ll rely on what has worked so far—namely, those dogged facts. “We’re going to need somebody who can say, ‘Wait a minute: Here’s the problem, here are the facts, here are the value judgments, here’s the way we will apportion burdens in getting to answers,” he says. Not exactly a ringing campaign slogan.
Running a state plays to strengths that Spitzer has yet to demonstrate. “Eliot will find new levers,” says Brown. Which, depending on where you sit, is either an ominous thought or a hopeful one.