Spoiling for a Fight: The Rise of Eliot Spitzer - Hardcover

Chapter One

When Markets Need to Be Tamed
 
Eliot Spitzer had had enough.
 
It was October 2004. For six months, the hard-charging New York State attorney general and his staff had been following a tip that the huge corporate insurance broker Marsh Inc. was taking secret payments to steer clients to particular insurance companies. And for six months the company's corporate parent, Marsh & McLennan, had been effectively stonewalling, contending that there had been no underhandedness--that Marsh's clients had known about the payments and that the money hadn't affected the recommendations of the firm's brokers. Months of combing through e-mails and company documents had shown just the opposite, and worse. Some Marsh brokers had solicited false bids and told insurance companies what fees to charge so that they could steer business to favored firms. That was price-fixing, which was not only fraudulent behavior but a crime. Several insurance executives involved had already confessed and agreed to plead guilty.
 
But when Spitzer and his lawyers met with Marsh & McLennan's general counsel, William Rosoff, on October 12, they didn't get the mea culpa they had expected. Instead, they got the brush-off. Rosoff insisted that his company didn't understand what all the fuss was about. It wasn't really clear what had happened. No clients had been hurt by the arrangements. This was just the way things worked. And finally he said dismissively, "You just don't understand the insurance business."
 
It was time to go public. Spitzer wasn't about to let an insurance broker push him around, even if it was the world's largest. As New York attorney general, Spitzer had spent much of the past six years mounting legal attacks on a variety of wrongs, which in his estimation included everything from Wall Street corruption to President George W. Bush's environmental policies. His balding pate, jutting chin, and pointing finger were ubiquitous on television news shows and in the pages of the country's top newspapers. When he ventured outside his downtown Manhattan office, he couldn't walk two blocks without being stopped by well-wishers who praised him for standing up to Big Business. Tipsters jammed his office phone lines with tales of woe and financial malfeasance. What's more, his investigations got results. Spitzer had faced down all kinds of giant firms, from the investment banks Citigroup and Merrill Lynch to the drug maker GlaxoSmithKline to the Food Emporium supermarket chain. He had exacted reforms and huge penalties: more than $1.5 billion from a dozen Wall Street investment banks for issuing biased research; more than $3.5 billion from mutual funds and brokers for improper short-term trading. And he was still only forty-five years old. All of this made him a rising star in the Democratic Party.
 
But in the Marsh case, Spitzer wanted to do more. He had decided to send a strong message to corporate America that his investigations were about more than money. From now on, top executives who presided over bad behavior couldn't simply claim they had had no idea what was happening, pay a fine, and expect to walk away unscathed. "We've been trying, through these cases, to make the larger point that some core ethical behavior is necessary," Spitzer reflected. "At some point you have to say, wait a minute, fellows. That's it. It's only when you hold the CEO accountable that you show people that something must change. The question is how to do that."
 
Dogged lawyers in Spitzer's office had already spent sleepless nights crafting a detailed and dramatic legal complaint that laid out the bid-rigging and contract-steering allegations against Marsh. But there was no evidence that the company's chief executive, Jeffrey Greenberg, had known about or condoned the scheme, which had started before his arrival at the company. Nor was it entirely clear that Greenberg had authorized Rosoff's stiff-arm defense. But even though the attorney general's investigators had never talked to the CEO directly, Spitzer was convinced the problems flowed from the executive suite. The bid-rigging case wasn't his first run-in with Marsh & McLennan. Its Putnam Investments subsidiary had been embroiled in the mutual fund trading scandal that had started the previous year. And its Mercer Consulting arm had paid a settlement as part of Spitzer's high-profile battle with New York Stock Exchange chairman Richard A. Grasso over Grasso's $140 million pay package. Marsh & McLennan "had three main businesses and no apparent controls in any of them. At some point you suspect the laxness is coming from the top. . . . It was at best a completely passive management," remembered David D. Brown IV, the assistant attorney general who spearheaded both the mutual fund and insurance probes for Spitzer. Bringing charges against Greenberg personally would be unfair, Spitzer knew. But there must be something else he could do.
 
On the morning of October 14, Spitzer gathered with his senior staff in his twenty-fifth-floor office in downtown Manhattan to prepare for that day's press conference about the Marsh case. Television cameras and newspaper reporters were already assembling in a room down the hall, and stock traders were hovering by their televisions, ready to dump their shares of whatever company turned out to be Spitzer's unlucky target. In Spitzer's office, his top deputies clustered beside his desk and peppered their boss with questions, pretending to be reporters. As the mock session broke up, Spitzer made an announcement. "I'm going to refuse to negotiate with this management," he said. Spitzer's lieutenants stared at him in silence.
 
Spitzer was proposing something unprecedented, at least in the recent annals of white-collar crime. In a free-market economy, boards of directors were supposed to have the freedom to choose company executives without government interference. By announcing that he would not negotiate with the firm's current leadership, Spitzer was imposing a Hobson's choice on Marsh & McLennan's board of directors--they could fire Jeffrey Greenberg or face possible criminal charges against the company. Recent history had shown that it was virtually impossible for a public company to withstand a criminal indictment. Just two years earlier, the accounting giant Arthur Andersen had all but vanished after being charged in federal court with obstruction of justice. And Merrill Lynch's stock had lost about 20 percent of its value in three weeks when Spitzer publicly refused to rule out corporate criminal charges. In the past, some prosecutors had asked for leadership changes as part of a settlement, but they had done it quietly, indirectly--the government might say to company lawyers with a knowing look, "You might find this case easier to settle if you had a different chief executive." No one could remember a case where a prosecutor went public with such a demand. "Are you sure you really want to do that?" asked First Deputy Attorney General Michele Hirshman, Spitzer's number two.
 
Hirshman and the others knew that Spitzer was already being roasted in the corporate world as a headline-hunting bully with no respect for market forces or due process of law. The Wall Street Journal editorial page, often seen as the voice of the business community's conservative wing, had made him its top enemy, editorializing against him weekly (and sometimes daily) as an ambitious meddler. The Forbes.com website was offering readers a printer-ready Halloween mask of Spitzer. Even some people who supported Spitzer's efforts to uncover fraud and change industries were perturbed by some of his tactics: the constant publicity, the rhetorical attacks on fellow regulators, and a perceived fondness for using the threat of criminal sanctions to pressure individuals and companies into cooperating with his probes. Forcing out Marsh's chief executive would only fan the flames.
 
To Spitzer, however, unusual times called for unusual measures. The collapse of the 1990s technology bubble had wiped out the college and retirement savings of millions of Americans. He believed that the country's business leaders had lost their moral compass. Some corporate giants, such as Enron and WorldCom, were so riddled with wrongdoing that they had collapsed when the fraud was revealed. Others, including some investment banks and mutual funds, had exploited their customers' trust in the name of higher profits. "How could we live in a society where we have so many smart people at the tops of these institutions and things have gone so terribly wrong?" Spitzer asked. "Have we forgotten our ethics?" Someone had to take action to protect the vulnerable, he believed, if only to restore the country's faith in its financial and political system. "The market does not survive without transparency, fair dealing and fair play," Spitzer explained. "We have persuaded tens of millions of Americans to invest in the market. If those new entrants to the market began to lose faith . . . they could withdraw from the market and put their money someplace else."
 
Spitzer believed that government officials should look back a century to another period when the country was coping with rapid economic change that created great wealth while impoverishing millions. Back in the 1890s, a small group of visionary but ruthless businessmen profited immensely from rapid industrialization and new economies of scale. Known collectively as the robber barons, titans such as John D. Rockefeller, J. Pierpont Morgan, and Edward H. Harriman built multimillion-dollar conglomerates and drove competition out of entire sectors of the economy. They dominated industry, finance, and commerce and tried to control the political process as well. But their success had a dark side. Factory workers lived and worked in appalling conditions. Poor harvests and rising indebtedness put many rural Americans at risk of losing their homes and livelihoods. Fraudsters abounded in the fledgling financial services sector, tricking innocent people out of ...