Spoiling for a Fight: The Rise of Eliot Spitzer

Washington Post Staff Writer Brooke A. Masters was online Monday, July 24 at 2 p.m. ET to discuss her upcoming book, Spoiling for a Fight: The Rise of Eliot Spitzer , to be published by Times Books in July 2006.

Since 2002, she has had a close-up view of corporate malfeasance - her assignments included the trials of Martha Stewart, Frank Quattrone, the Rigas family and Bernard Ebbers. She also reported extensively for the Post on Eliot Spitzer's various investigations.

In her seventeen years at the Post, she has also covered criminal justice, education, and politics. She has written extensively about espionage, capital punishment and terrorism. Her 2000 articles on the flaws in Virginia's death penalty helped prod the state legislature into passing a law that made it easier for inmates who claim to be innocent to reopen their cases. She also served as an assistant metro editor in charge of criminal justice coverage.

Born and raised in Manhattan, Brooke attended the Brearley School and Phillips Exeter Academy. She graduated summa cum laude from Harvard University in 1989 and earned a master's in economic history from the London School of Economics.

A transcript follows.

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Brooke A. Masters: Welcome to our discussion. I'm Brooke Masters and I'm the Washington Post's Wall Street correspondent. I've covered Eliot Spitzer since 2002. While I was researching my book, I had extensive access to him, his staff and his adversaries. I'm excited to talk about what I learned about his investigations and about his political prospects. So let's get started.

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Boston: Why didn't Spitzer pursue the billions of dollars of restitution that mutual fund shareholders lost due to the trading costs incurred by the late trading scam?

Brooke A. Masters: Actually Spitzer and the SEC have negotiated the return of $3.4 billion in restitution and reduced fees for mutual fund shareholders who were harmed by market timing. Just today, Waddell and Reed agreed to pay $50 million in restitution and cut fees by $25 million for its mutual fund customers. It was the 19th such settlement Spitzer has negotiated since 2003.

Here's the link to the press release:

http://www.oag.state.ny.us/press/2006/jul/jul24a_06.html

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Arlington, Va.: The impression I have is that Spitzer was at odds with federal regulators and prosecutors on what he was doing. Is that correct? Or did the AG actually work closely with the feds in trying to clean up Wall Street?

Brooke A. Masters: Both things are true.

Spitzer has routinely irked and annoyed the Securities and Exchange Commission (SEC) and the U.S. Department of Justice by charging into areas where they generally have jurisdiction, such as mutual funds and stock research. In some cases he has even rushed to file complaints while his federal counterparts were still working on their investigations.

At the same time, once Spitzer has gotten the ball rolling by bringing the first case or holding the first press conference, he has been more than happy to work with the feds because 1) they have more resources than he does and 2) the SEC has the administrative authority to rewrite the rules for entire industries.

Spitzer sees his role partly as a catalytic one--he charges in and reveals the problem but he works with the feds in coming up with a long term solution.

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New York: Spitzer's first settlement made a mockery of the First Admendment by regulating how and when securities analysts conduct their business. If the US AG forced regulation upon journalists you would be screaming your heads off.

Secondly, Spitzer has yet to put any corprate criminals in jail, but he has forced settlements which have resulted in the elimination of over ten thousand high paying jobs in the United States of America. These people that lost their jobs did not commit any crimes. There crime was going to work every morning and supporting thier families.

My,question is how has Spitzer improved the lives of anyone in New York and is the his crusade against corporate corruption worth the price paid by middle class Americans both in lost civil rights and lost jobs?

Brooke A. Masters: The limits on stock research have been expensive for the investment banks (lots of lawyers and chaperones to make sure bankers don't overly influence research) But I'm not sure it really had that much impact on the analysts' free speech rights.

They can still say what they believe about companies. It just has to be backed up by research and they have to disclose any conflicts of interest.

The 10,000 jobs lost is hard to calculate. Certainly insurance broker Marsh & McLennan laid off thousands after its bid-rigging scheme was revealed, but bid-rigging has been illegal since the 1890s so it's hard to argue that Spitzer was out of line in investigating that one.

Other job losses are more complicated--the investment banks and mutual fund companies that did layoffs often had problems far greater than Spitzer's probe (Fund companies Putnam and Janus were losing assets well before Spitzer and their woes continued well after.)

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Alabama: Did Spitzer draw any inspiration from Connecticut's Richard Blumenthal, another crusading Attorney General? Blumenthal was often discussed as a gubernatorial candidate but never pulled the trigger on a campaign (maybe Spitzer learned from that).

Brooke A. Masters: Spitzer and Blumenthal (also a Democrat) are old friends, and right after Spitzer was first elected in 1998 he met Blumenthal for breakfast and asked for advice.

They've also worked together on environmental, insurance and gun cases.

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Washington, D.C.: In your book excerpt that the Post has online, you detail how Spitzer allowed Eddie Stern to settle financially in the late trading case. Yet didn't the bank staffer who was instructed to execute those trades face something like 30 years in prison at Spitzer's urging? Of course, a jury rejected Spitzer's case across the board but what do you make of the disparity in how he approached the case?

Also, isn't there some question about the legal/ethical merit of the Martin Act?

Brooke A. Masters: Spitzer's decision to let Eddie Stern off with a civil settlement while pressing charges against the broker who put through Stern's trades, a guy named Ted Sihpol, has stirred more controversy than almost anything else Spitzer has done.

In my book, Spitzer argues that cutting the deal with Stern was necessary to jump start his efforts to go after the mutual funds and

Brooke A. Masters: get them to return money to their customers.

While he defends the decision to press charges against Sihpol he is somewhat regretful that he didn't cut a deal that would have convicted Sihpol but spared him jail time.

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Harrisburg, Pa.: Eliot Spitzer is the model of an Attorney General who takes his infrequently enforced state laws and aggressively prosecutes white collar crime (hint, hint, other states' Attorney Generals). Why do fewer Attorney Generals aggressively fight white collar crime: is it because the functions of these offices involve much civil and legislative work, and is the fact that in many states these are elective offices and it may be hard to fund raise from white collar contributors if one campaigns on a aggressive white collar prosecution campaign? What is your analysis?

Brooke A. Masters: Spitzer has two crucial advantages over many other AGs: he's in New York where every financial services companies have to do business. (If he were in North Dakota they could just pull out rather than deal with him.) He also has the Martin Act which is an extremely broad anti-fraud law than gives the New York AG powers that other AGs don't have

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Washington, D.C.: Has Spitzer been asked upfront about his presidential ambitions during his current campaign for governor? Will he take an "I won't run" pledge?

Brooke A. Masters: When I asked him, he demurred and said he is interested right now in NY governor. He is certainly not running in 2008. Beyond that, who knows?

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Washington, D.C.: I have heard anecdotally of a few Wall Street hedge fund managers who are very supportive of Spitzer. This seems to conflict with the anti-Wall Street image that some have cultivated of him. Can you explain this discrepency?

Brooke A. Masters: Spitzer is no flaming populist. He always talks about how he wants to reform capitalism, not kill it. His father made a fortune in real estate and Spitzer spent part of his adulthood helping to invest it. Some of his closest friends run hedge funds and he and his family have given them money to invest.

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Vienna, Va.: Given all his talk about protecting the retail investor, how much money has actually gone back to the retail investor? He is shaking down these financial giants, but where is the money going.

Brooke A. Masters: The $1.4 billion global research settlement was complicated. Twelve 12 banks paid in to a pot to settle with the SEC, Spitzer and other state regulators over allegations of biased stock reports, The money that went to the SEC went back to investors, there was a pot for investor education that has gotten tied up in bureaucratic wrangling and some of the money went to state coffers including New York.(This was controversial and led to criticism of Spitizer. That may be why Spitzer has emphasized restitution ever since.)

For the 2003 mutual fund scandal, all of the $3.4 billion in payments went to investors. And the 2004 insurance scandal led mostly to restitution for the companies hurt by the bid-rigging.

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Washington, D.C.: What's the Hillary-Eliot dynamic like? Two N.Y. politicos with national star power...

Brooke A. Masters: They get on surprisingly well. She likes smart men, he likes smart women and they both see the advantage of having a homestate politico to watch their backs. (Both have much pricklier relationships with Chuck Schumer and Pataki of course is a Republican) One of her prominent advisers recently came out and criticized Spitzer's primary opponent Tom Suozzi for getting too personal with his attacks on Spitzer

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Alexandria, Va.: What are Spitzer's chances for winning November's NY gubernatorial election and the Democratic primary? Tom Souzzi seems to be a formidable opponent and a better politician.

Brooke A. Masters: The Sienna Institute monthly poll of New York voters just came out today and things are looking grim for Suozzi:

"Loudonville, NY - Attorney General Eliot Spitzer will walk into the first Democratic gubernatorial debate tomorrow with a stunning 78-9 percent lead"

That's three points worse than last month....

There's a televised debate tomorrow and I suppose that could change the dynamic a bit.

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Follow up to Alabama's question: Another crusading AG the fits the Blumenthal-Spitzer mold is Michael Moore in Mississippi (took on the tobacco firms).

Brooke A. Masters: Moore is certainly one of the recent crusaders. Previous NY AG Robert Abrams also did a bunch of work in the 1980s on consumer protection and environmental issues

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McLean, Va.: His family has strong ties to the real estate industry in NY, yet he has not looked at that industry as one that needs to be "cleaned up." Any comments?

Brooke A. Masters: I asked him that and he said that he would take a case if someone brought him one. That of course is a bit disingenuous because he could also go looking for cases.

His family could be a factor. Another is timing--the New York real estate market was going gangbusters for most of his time in office while the stock market had a major crash. Big losses tend to bring out the enforcers and the tipsters.

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Washington, D.C.: Will Wall Street "vote" for Spitzer this year?

Brooke A. Masters: So far hedge funds are giving money to Spitzer, allies of Invemed investment banker Ken Langone (who is angry that Spitzer sued him and the New York stock exchange over ex-chairman Dick Grasso's $140 million retirement package) are giving to Suozzi

But most of the street is staying out of this fight at least on the money side

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Sanibel, Fla.: Twenty years ago, Colonel Oliver North nearly pulled down the Reagan White House with reckless emails on the Iran-Contra issue. More recently, the two biggest lobby scandals in US history (Abramoff Indian casinos and USAF/Boeing KC-767 aerial tankers) were traced by incriminating emails. Throughout Eliot Spitzer's investigations, emails were the fingerprints that tracked down the crimes. Will these people never learn? Are emails a manifestation of an ego trip these zillionaires simply can't kick?

Brooke A. Masters: I think people just don't focus that their emails can be retrieved.

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New York responder: Ms. Masters,

Being from New York and a longtime Democrat, I'm looking forward to reading your book about Eliot Spitzer. Given the long tradition of populist Democratic Governors in New York(e.g. Mario Cuomo, Franklin D. Roosevelt, etc.) it will be interesting to see if Spitzer will be elected and if he is, how the office may change him. Assuming he is elected, how do think his transition from attorney general with a "prosecutorial zeal" to governor who has to compromise in order to get deals done will work?

Thanks.

Brooke A. Masters: You are definitely the target market for my book. The entire last chapter is focused on assessing whether Spitzer can make the transition from the black and white mindset of a prosecutor to the more nuanced worldview of a governor who must build alliances and compromise.

I think the jury is definitely still out on that question. Spitzer does work well with his senior staff (unlike, say, Rudy Giuliani who ran through police commissioners and school superintendents as New York mayor). But he's also famous for yelling and insulting his adversaries and I doubt that will play well with the legislature.

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New York: How big is Spitzer's office? How does he get all the case work completed on this highly complex prosecutions?

Brooke A. Masters: The office is one of the largest AGs offices in the country with 1700 plus staff members and 500 plus attorneys. Over half of them are focused on defensive issues (they defend the state when it is sued). The investment protection bureau which does most of the Wall Street cases was only a dozen lawyers when Spitzer brought the Merrill case. It's now got about 40 lawyers.

One reason Spitzer is so successful is that the SEC ends up following his lead and doing much of the work---he brings the first case, they bring the follow ups

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Silver Spring, Md.: Why is Suozzi challenging Spitzer in the Dem. primary?

Brooke A. Masters: I think Suozzi is an ambitious guy who doesn't see anyplace else to go. He's been Nassau County exec for a while, he's not a lawyer so AG is out, Lieutenant governor is a meaningless job and Alan Hevesi is entrenched at Comptroller. Hillary and Schumer have the Senate spots so unless Hillary wins the presidency, Suozzi is stuck.

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Anonymous: Why is it that so often an article about Spitzer's work starts off, "...in his bid for the governorship...," as if there is something suspicious about why he is trying to clean up the securities industry? I find this to be an unnecessary and virtually insulting addition to the reportage.

Brooke A. Masters: Many of Spitzer's opponents say he grabs the headlines because of his political ambitions.

My personal impression is that he is ambitious and wants badly to be governor but for policy reasons rather than simply for personal aggrandizement. He really thinks he can improve New York and American government. So to him, the high-profile cases have two merits---they achieve the changes he believes are necessary and they increase his stature so that he can go on and make more changes.

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New York, N.Y.: Eliot Spitzer is oft accused of opportunistically encroaching on the federal government's exclusive powers (i.e., prosecuting Person X when the SEC won't). I wonder if that means Spitzer's critics are robber-barons who hate that he jails robber-barons. On the other hand, it could mean that Spitzer prosecutes entrepreneurs to populist cheers even though from an economic perspective all they've done is what entrepreneurs historically do in capitalist democracies. Given your scholarly background in economic history, do you, in your book, analyze from an economic perspective the financial transactions that tend to lead to Spitzer's criminal prosecutions? Also, was the timing of your book coordinated to have impact on Spitzer's run for governor, and has it any nasty dish that Faso or Suozzi could use? Did you take into account such an impact when writing or editing the book?

I ask these questions because I'm considering purchasing your book. Thanks for answering my questions.

Brooke A. Masters: I do try to address these issues in the book. (There's a whole chapter on the issue) Some people argue that Spitzer's methods are not that different from any agressive regulator or prosecutor. His targets simply have the money to fight back with their own pr firms and high priced lawyers.

I think some of the scholars who criticize him for encroaching on federal powers genuinely believe that there should be a division of responsibilities. The businesses that complain tend to be more self-interested in that they would rather not be tightly supervised and regulated.

I do try to explain the economic implications of some of the activities that Spitzer went after as well as some of the fallout.

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Asburn, Va.: Thanks for covering a public official of the type one wishes we would have more of...Spitzer has have pulled me back from becoming completely cynical in believing that our system in unable to protect the interests of common consumers like me (against corporate interests). How do you rate his prospects in quest for the NY governorship? Thanks,

Brooke A. Masters: Spitzer is the prohibitive favorite. My colleague Chris Cilliza who rates the governor's races says it is the governors mansion most likely to change parties this fall (from Pataki who is a Republican to Spitzer who is a Democrat). Spitzer could still mess up, of course, but the race is very much his to lose.

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Brooke A. Masters: I hate to do this folks, because there are still a bunch of interesting questions in the queue, but I have to write a daily story. (The healthcare firm HCA is being bought out by a bunch of private equity firms.) My editors will clobber me if I don't get going...

You all are a smart and informed audience. I hope you'll join in when the website hosts my occasional chats about Wall Street and investing. If you're interested in learning more about the book, check out my website www.brookeamasters.com

Thanks again,

Brooke

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washingtonpost.com: Thanks Brooke and thanks to all our readers for participating in today's discussion.

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