American Enterprise Institute

August 7, 2006

[Edited transcript from audio tapes]

1:45 p.m.	Registration
2:00	Presenter:	Brooke A. Masters, Washington Post
	Discussant:	Michael S. Greve, AEI
	Moderator:	The Honorable William H. Pryor Jr., U.S. Court of Appeals for the Eleventh Circuit
4:00	Adjournment

Proceedings:

Michael S. Greve:  Good afternoon.  Welcome to the American Enterprise Institute.  My name is Michael Greve.  Since I’m one of the panelists today, I will not introduce myself.  But I will introduce our moderator, Judge William Pryor of the Eleventh Circuit Court of Appeals and a former Attorney General for the State of Alabama. 

William Pryor:  Welcome everyone to the American Enterprise Institute to a book forum on Brooke Masters’ new book, Spoiling for a Fight: The Rise of Eliot Spitzer.  We are going to have a panel discussion with the author, Ms. Masters, and with Michael Greve.  I will tell you a little bit about each of them and they will then speak in that order.  We will then open it up for Q&A.

Brooke Masters covers Wall Street, the securities industry, and white-collar crime for the Washington Post.  Since 2002 she has had a close-up view of corporate malfeasance, for example, covering the trials of Martha Stewart and Bernard Ebbers.  She reported extensively for the Post on Eliot Spitzer’s various investigations in New York.  In her 17 years at the Post, she has also covered criminal justice, education, and politics.  She has written extensively about espionage, capital punishment, and terrorism.  Her prior assignments also include serving as an assistant Metro Editor in charge of criminal justice coverage.  Spoiling for a Fight: The Rise of Eliot Spitzer is her first book. 

Mike Greve is the John G. Searle scholar at the American Enterprise Institute where he directs the Federalism Project.  His research and writing cover American federalism and its legal, political and economic dimensions.  Dr. Greve co-founded and, from 1989 to 2000, directed the Center for Individual Rights, a public interest law firm that served as counsel in many precedent-setting cases before the Supreme Court of the United States, including United States v. Morrison and Rosenberger v. the University of Virginia.  He has written widely on constitutional and administrative law, federalism, environmental policy and civil rights. 

Please welcome our panelists.  Ms. Masters if you will begin our discussion.

Brooke Masters:  Thanks very much for having me.  I thought I would just tell you how I came to write about Eliot Spitzer.  I’m one of the Washington Post’s two financial reporters based in New York, which means I’m a jack-of-all-trades.  While my beat is officially white-collar crime, if something is happening that does not involve the market directly, I cover it.  Every three or four months, there would be a call, “Eliot Spitzer is having another conference.  Could you please go find out whether we care?”  I would say that 90 percent of the time we did care. 

First the analysts, then there were some environmental cases.  And there was something about royalties paid to musicians, and then it was mutual funds, and then it was insurance companies.  And somewhere in there was Dick Grasso, but luckily I was on vacation that week. 

I would go to these press conferences, talk to Spitzer’s supporters and his critics, and write the story.  I kept hearing the same things:  “This guy is overstepping his bounds.  He is completely perverting federalism by doing all the things the federal government ought to be doing.”  As I was listening, I recalled something sort of like this I’d heard before, about an abusive publicity-seeker picking on business in an inappropriate way and abusing the media. 

I’d heard it before was when I was writing my college thesis about Louis Brandeis.  Before Brandeis went on the court, he was a crusading lawyer who investigated insurance companies, power plants and owners of corporations. He would hold press conferences complaining that the chairman of US Steel had given his wife a $100,000 diamond necklace and that was an inappropriate use of corporate funds.  I do not think it was actually financed by corporate funds, but that is what Brandeis said at the time. 

I started thinking that Spitzer and Brandeis had a lot in common in that they were both trying to change the relationship of government and business.  They believed very strongly, both of them, that government should take a more active role in controlling the market and keeping business from taking advantage of consumers and investors.  While Brandeis is now a hero and clearly did some really fabulous stuff on the court, his economic theory was a little bizarre at that time.  He actually believed that small businesses ought to be allowed to collude and that antitrust laws should apply only to large companies, which no one believes now.

Is Eliot Spitzer a 21st century progressive, and does he in fact share both the plus side of the progressives, which is that he believes--and I genuinely take him as one who believes in trying to help the little guy—and the negative, the progressives’ misguided economic theory?  I decided to write this book.  Being a Washington Post reporter and congenitally addicted, like our editorial page, to the on-the-one-hand, on-the-other-hand school of writing, I talked to everyone on every side, which is how I met Michael Greve.  I needed to find out exactly what was wrong with Eliot Spitzer so that I could explain that, too. 

I concluded that I really do think that Spitzer is fundamentally trying to shift the way our country deals with the markets.  And his methods in doing so are kind of frightening in some ways, frankly, because he does believe in public humiliation and shame as effective ways to take care of businesses and make them do what he wants.  At the same time, he is remarkably effective, and he has brought interesting changes.  Whether you think they are for good or evil is, I think, somewhat dependent on your ideology. 

I also spent a lot of time getting to know Eliot Spitzer.  I interviewed him about 13 or 14 times just for the book.  When he was doing his cases, I would talk to him.  Every press conference, I’d have an interview afterwards.  I spent more time with Eliot Spitzer than most people, and so I got an interesting perspective on this guy whose public persona is, in many ways, rather unattractive.  He stands up in front of a podium and yells at people.  In private, he is a more complicated and interesting person who, despite his reputation, likes give-and-take, likes debate.

He has a really interesting view of federalism which was one of the central themes of this book.  He was a progressive--I think other people would say liberal Democrat--who came to politics believing the federal government was the be-all and end-all of regulation and of law-making, and that is where power ought to reside.  He was a classic descendant of the Great Society in that way.  But he was actually in law school when the Federalist Society got going and actually absolutely hated it.  He thought it was a misguided and evil attempt to bring us back to the days of Jim Crow.  I think he would say even now that that is what he thought back then.  As the balance of power has shifted in our governmental system, there really was an attempt to return the power to the states; and the Federal government decided to adopt a more cooperative free market approach, he sensed an opportunity.  He is nothing if not an effective lawyer.  He saw an opening that made him think, “They want to give state governments more power; I’m going to use it.”

He was, of course, aided by the bizarre 1924 law called the Martin Act, which is at the center of most of his powers.  The Martin Act is a classic Blue Sky law, which means that you cannot rip people off by selling them a piece of blue sky.  When it was passed, it was actually significantly weaker than most other state laws and was therefore not subject to as many challenges and had not been revised since the 1920s.  Because of that, it hadn’t been properly defined, and has actually ended up being completely open-ended. Accordingly, fraud is what the Attorney General of the State of New York says it is, because you do not even have to prove intent to defraud.  Spitzer decided I’ll take that and I’ll run with it.  We are all living with the consequences. 

Most people know about Spitzer’s investment cases.  The first big case was against stock analysts where Spitzer got some emails in which Henry Blodgett had written some private emails saying that he thought a bunch of the companies he was covering were awful.  He called them POS for “piece of …”  At the same time, he was writing research reports that were released to the public saying “Buy them.”  In fact, these emails may have been legally defensible because Blodgett’s argument was that the companies are terrible but everything in the internet sectors is going up.

The cases are not as slam dunk as they sound at first blush, but Spitzer and his legal team--they are great brief writers--wrote this up into an application under the Martin Act, under which you do not need to prove anything, but only tell the judge what you found.  They wrote up this wonderful complaint that made very clear that the investment banks were pushing stocks that they did not personally believe in because it was going to help and get investment banking business.  The complaint was dramatic, and it was palatable to the average American.  It landed at a time when Americans were ready to listen to someone asking questions about Wall Street because the tech bubble had just popped.  Normally, the bursting of a stock market bubble always leads to people looking for bad guys, but I think this time it hit particular hard because more and more Americans have their money in 401k plans.  Their retirement money was going down, not just some money that somebody else had made or lost.  There were a lot of very angry senior citizens, people whose kids’ college education suddenly had become unaffordable, and they were looking for somebody to stand up for them.  Spitzer’s dramatically written complaint was billiant theatre among other things. 

Th SEC fumbled and did not immediately take charge of the issue, which they probably could have.  I like Harvey Pitt very much personally.  I think he is brilliant, but he mishandled and allowed Spitzer to run with it.  B the time things got back under control, the banks had paid a lot of money and instituted some reforms which I’m not sure really did much of anything, but at least analysts now have to tell you whether or not they believe in the stock they are recommending. 

Spitzer’s next set of cases were mutual funds, where he revealed that some mutual fund companies, but by no means all, had cut secret deals in large investors in a hedge fund were allowed to make trades that small investors were prohibited from making.  The end result of these trades was that the hedge funds made a lot of money and small investors got somewhat less money.  The hedge funds are making money hand over fist, and a small investor’s returns were cut, according to one estimate, a little under a tenth of a percentage point.  It is not a huge amount of money but across a trillion dollars, it is a lot of money.

Again Spitzer wrote this dramatic complaint, calling it betting on horse races after they are over.  Small investors understood that things had not been playing fair for them and they were still really mad that they lost all their retirement and 529 savings.  So they ate it up. 

In the insurance investigations, after the mutual fund cases, he took on bid rigging.  You can argue about his tactics in that one, where he basically called for the resignation of a publicly-traded company, which I think most people would say it is beyond the pale because it is interfering with corporate governance.  At the same time, he was investigating out now straight MAFIA-style bid-rigging, which has been illegal since the 1890s.  Unlike his other cases in which he was trying to make things illegal that were cheesy but not necessarily illegal, the insurance cases actually were a legal case, and he would have completely pulverized that company if it ever gone to trial. 

He also does things like sue power plants in Ohio because they are polluting New York.  He has sued grocery stores.  In Manhattan, because nobody has a car, people are dependent on delivery men to deliver their groceries.  Two hours after you shop, somebody with a cart shows up with your groceries at your house.  It turned out those people were independent contractors, and they were basically making a dollar a delivery, which is well under New York’s minimum wage law to put it mildly.  Spitzer, instead of suing the delivery company that at least nominally employ these people, sued the grocery stores and used a 1940 Supreme Court Case involving window washing at a factory to argue that the grocery stores were responsible.  He won a big victory there and has sort of changed the grocery delivery market in New York.  That is sort of classic Spitzer.  He takes some law that is from the ‘40s and throws it at some other company, and everybody pays money in order to make him go away.

At the same time, he argues that he is working on behalf of the small investor, the consumer, and the worker.  In that way, he is an interesting progressive in that he believes he is redressing the balance of power for people who are relatively powerless versus companies that are relatively large.  I think that drive has a lot of resonance right now for Americans who feel very much at the whim of the global economy.  They do not understand the stock market, they do not have defined pensions anymore, and they feel like jobs are going to India.  A guy who gets up and says, “I’ll sue the heck out of corporations, and I’ll say nasty things to the Chairman of Goldman Sachs because I’m doing it for you,” has tremendous resonance, particularly in a state like New York. 

I think that helps explain why at the moment he is leading the primary vote in New York by 65 points, and is actually winning 55 percent of the Republican vote in the latest polls.

He is one of those people who is trying to change the world, and he is either going to do it or he is going to go down in flames trying.  Whether you want the world changed the way he wants to change it really is an open question.  That is part of what this book is about.  I’m very much I-report-you-decide (I know that is the FOX slogan but it is actually true in my case).  This book is about this guy who really does want to fundamentally change the way government works.  Here are all the ways he does it and the ways he cuts corners and the inspiring things he does for some people.  What do you think?  I want all of you to read the book and let me know. 

Michael Greve:  Thank you.  Thanks, Judge, for moderating this.  Thank you all for coming.  Thank you very much, Brooke, for participating in this.

I have read several reviews of this book, which really do not do it justice.  This is a terrific book.  It is one heck of a book.  It would have been easy to write a book that is cobbled together from the newspaper headlines.  God knows there were not enough of them.  It would have been easy to write a book that is interesting for lawyers because there is a lot of legal ledger demand going on and that is always interesting to follow.  It is very hard to write a book that explains the legal maneuvering in plain English and this book does that.  It is very hard to get exactly the right distance from what you are reporting on in this book without getting, again, lost in the weeds.  This book gets the right distance. 

There are only few examples that I can think of in American politics that read as engrossingly and informatively as this book.  Jeff Birnbaum’s book on Showdown at Gucci Gulch is a book like this.  Peter Irons has an older book on the New Deal Lawyers, which has the same style and genre and the same perceptiveness. 

This book also gives you a sense of how this stuff actually works. It is very fair-minded, and one test of that is that people take away from it, or a lot of it, what they bring to it.  The review for the Washington Post came away with admiration for Eliot Spitzer.  I bet he started the book with admiration for Eliot Spitzer.  I myself was scared of Eliot Spitzer before I read it, and now I’m even more scared.  Let me tell you the reason why.

I think that when people announce Mr. Spitzer as a demagogue, they are precisely right.  It is not his use of the news media.  What I have in mind is somebody who is much, much smarter than he makes you think he is.  I’ll give you few examples of this.  My first example is Mr. Spitzer himself volunteers that he is doing industrial policy for the country.  He is not trying to redress violations inside the state of New York.  He is really trying to remake American industry.

Steve Cutler, the Enforcement Chief for the SEC, wrote up this little spoof on Eliot Spitzer.  They are fake emails from Eliot.  From Eliot to the Vatican:  “Dear Pontiff, I have some comments on your recent papal edicts.  While you are and should be the primary regulator of Catholicism, I believe you may have been asleep at the switch on this whole business of transubstantiation.  As I read the Stamp Act of 1785, I have the authority to tax and regulate all items passing through New York, which I believe includes Catholicism.”  There is a final email from Eliot to Heaven.  “Dear God, it is my understanding that you are everywhere, including apparently the state of New York.  As I read the Stamp Act of 1785 you are subject to regulation and taxation by the State of New York.  While you are and should be the primary regulator of humanity, I have some ideas that I would like to share with you.” 

That is Spitzer in a nutshell.  He says, “I understand all of this stuff should be done in Washington, except it is not being done, and so I’m the method of last resort.”  The question is, who does he think he is kidding there?  He says, “Look, we have preemption disputes with every federal agency.”  Chances are if you cannot find a single federal agency that is actually doing its job, you are calling the shots.  And that, of course, is the truth of the matter.  He understands very well the power to say when the system has broken down is the power to run the system, and that is the power he is claiming.

Example B:  Mr. Spitzer has given all these happy speeches about there was massive fraud in the markets prior to the collapse.  All we do here in New York is enforce the law.  Besides, we always get our man and everybody is always paying up, and so that goes to show we are right there.  There is all that stuff out there and we need to enforce the law. 

I think that is very demagogic at several different levels.  The first level is the tactics, especially the tactic under the Martin Act which Brooke mentioned, which is to threaten the firm with criminal indictment, which means an annihilation as we learned in Arthur Anderso, and then make them handle the trophies.  You are not going to get Sandy Weiler as the trophy but you are going to get Henry Blodget as a trophy.  And the book is just very, very good on that. 

In fairness, and here I’ll show my true colors, Mr. Spitzer is not the only one who is currently perfecting those kinds of tactics.  The Department of Justice, and I mean the Federal Department of Justice, is pursuing the same storm trooper tactics under something called the “Thompson Memorandum.”  There have been interesting judicial rulings on these things.  The District Courts have mercifully been a last line of defense in these kinds of things. 

But Mr. Spitzer has undoubtedly pioneered some of these kinds of things.  The deeper level at which - I think this insistence on “we are just enforcing the law” is very demagogic is that enforcing the law is no substitute for sound prosecutorial discretion.  Over-enforcement, excessive enforcement is always a risk even if you think the underlying legal system makes sense.  I have nothing against meat inspection laws, but it is perfectly clear that if you were to enforce them to the letter we would be running out of chicken food tomorrow.  I have nothing against many environmental laws, but every firm in the country is at all times in violation of one environmental statute or the other.  If you really were to enforce the law, all of the economy would shut down tomorrow.  The same is true of multiple legal systems, all of them overlapping, so you cannot just stamp your foot and say, “We are enforcing the law.” 

That is the hallmark of a demagogue and not of a prosecutor.  What do prosecutors do to minimize or to account for this risk of excessive enforcement?  One of the things you can do is where there is a clear legal standard, you should not go out and trump it with a loosey-goosey standard as the Martin Act, as a fraud is whatever the AG in New York says it is.  You exercise some discretion in deciding who is guilty and who is not instead of saying, “This whole place is a pigsty.  Everybody goes to jail until I get my own CEO installed here,” and you keep the remedies in these disputes tied to the underlying violations if you can.  That is to say, you are not trying to remedy violations that never occurred. 

If you read this book it becomes obvious to you how reckless Mr. Spitzer has been at all these fronts.  Take the late trading charges.  There was no evidence that those kinds of transactions were even illegal under the SEC standards. Nonetheless, he resorted to some of the more creative and inventive and adventurous theories in New York.  Yes, it kind of looks sleazy.  You look at the Merrill Lynch disclosures.  Merrill Lynch was not some boiler room outfit.  Everything Merrill Lynch did was done in meticulous compliance with the SEC guidelines.  And when the fruits of the investigation called that the Dinallo affidavit hit the courts because these are public investigations that the New York AG office can do, hand them over to their friends at Milberg Weiss and have Milberg Weiss file a class action in New York.  When that class action was filed, Judge Oreck looked at the entire memorandum and said, “This is such a piece of garbage.  I cannot believe it,” and wrote a very long, detailed explanation of why under the security statutes, the plaintiffs plainly did not have a case. 

It was only by proceeding under these free-wheeling New York standards that there was even a semblance of the case for the AG in the first place.  And the remedies that Mr. Spitzer has insisted on are completely disconnected from the underlying conduct.  Take the Marsh and McLennan, the insurance brokerage dispute.  You start with examples of bid-rigging, which I totally agree are completely unlawful.  Those guys ought to go to jail. 

But he did not stop there.  From then on it is on to, “Hey, bid-rigging is just like contingent commissions which is the industry practice, and what I, Eliot Spitzer, have here in my pocket is this whole new business model, not just for Marsh McLennan but for the entire industry.  That is what we are going to impose.  I will not rest until my preferred business model is the standard practice in this industry.”  And at that point you are far removed from instances of bid-rigging regardless of how pervasive they were at the front end. 

That brings me to my final point.  In lots of these areas, the underlying law does not make sense.  Mr. Spitzer has piled on stuff that makes even less sense.  Take the Marsh McLennan case: contingent commissions, which are the fees--which Mr. Spitzer calls kickbacks--insurance brokers to pay to insurance companies and vice-versa.  That was the standard practice in the industry for what, three, four decades?  In an intensely competitive industry where the consumers are not widows and orphans, they are Ford Motor Company.  If a practice persists for that amount of time in that kind of industry, you have to assume that it has some efficiency properties even if you do not fully understand what exactly they are.  Strolling in there and wiping out a whole lot of market cap in the transition to a new regime, you really have to be somewhat nervous and more circumspect it seems to me than Mr. Spitzer has been. 

The net result of this, apart from the structure of shareholder equity, is that now the insurance companies have to do their own marketing.  Maybe that is a good thing.  Maybe that is a bad idea.  I have no idea quite frankly, but again a little more circumspection in those regards would have been a nice idea, and so, too, with these allegations of so-called massive fraud at Merrill Lynch and the other brokerage houses.  He himself does not believe that.  If there had been massive fraud on the scale that Mr. Spitzer has alleged, a hundred million dollar fine for Merrill Lynch and fines in the same order of magnitude for the other houses does not begin to redress it.  A hundred million dollars is what Merrill Lynch spends on coffee on a good afternoon. 

What he was really after was the structural reforms.  And again, if you think that those particular reforms he has introduced, and there is a whole gaggle of them, will get to the root cause of this, you are gravely mistaken.  It seems to me that he knows that the root cause there was a speculative mania that persisted for several years in the equity markets, and what a responsible regulator, not that the SEC is a responsible regulator, but what some responsible regulator might have said is, “Look, guys, you have to understand the investor.  You have to understand Wall Street.  It is tens of thousands of very wealthy, very smart people who play with other people’s money. Before you enter that casino, pay attention.”  And by the same token these very, very smart people are getting paid tons of money to discover the slightest inefficiency in those markets.  What makes you believe that you can beat those kinds of markets?  Is that what they were telling us, what any regulator, let alone Eliot Spitzer was telling investors?  No. It seems to me playing with people’s worst instincts in saying “There was massive fraud.  That is why you lost money in these day trading schemes.”  I think that is really demagogic act of irresponsibility.  That is Mr. Spitzer’s chief inheritance to us, so to speak, as he departs his office.  Thank you.

William Pryor:  Thank you, Michael. I knew that this would be a provocative discussion.  I want to ask Brooke, as a follow up to Mike’s presentation, this question.  It is sort of open-ended but I want to give it some framework. 

Professor Lillian BeVier of the University of Virginia Law School, several years ago, wrote a short essay about the rule of law.  Her statement was an essay and a collection with reference to the Clinton administration, but this was the general framework she gave for an understanding of the rule of law: 

“A government of laws, not of men, refers to a legal and political order in which clear and personal, universally applicable general laws constrain the conduct of both individual citizens and those who govern them in which no act is punishment except pursuant to a pre-existing rule, and in which a stable, relatively permanent organic law, such as a written constitution, constrains and separates the institutions to exercise their everyday law-making, law-executing and law-abiding powers.”

In other words, a government of laws and not of men is a government that is limited in principle.  It is not a government that may act as it pleases and simply deem its actions as law.  To what extent do you think General Spitzer’s record conforms or does not conform to that vision of the rule of law? 

Brooke Masters:  I think some of it depends on whether you believe the people he has been trying to go after, whether they were within the bounds of law or not.  I think the valid criticism of Spitzer is that he goes after activities that have not previously been clearly defined as illegal.  I think market timing is probably the best example in some ways.  Market timing is the practice in mutual funds of throwing a ton of money at some period of time and then pulling it right out again when you think you have gotten enough, you got profits.  Basically hedge funds are trying to figure out when a mutual fund is under priced.  It takes advantage of the fact that mutual fund is priced once a day but stocks change prices all the time. 

Market timing I think actually is not illegal.  There is nothing wrong with it.  From the perspective of the hedge funds, they were doing something legal.  For Spitzer to come after that activity was unfair and, I think, a violation of Lillian BeVier’s definition of the rule of law.  You do not punish things that are not clearly illegal.  But the thing that is interesting about that is that he did not go after the hedge funds.  They did not pay a cent with the exception of Eddie Stern who was late trading, which is a somewhat different offense and a lot less clearly okay. 

He went after the mutual fund companies, saying to them, “You mutual fund company cannot publish in your prospectus and on your website:  ‘We do not allow this behavior and we will kick you out,’ and tell that to the small investors while secretly taking money from a large investor to do it.”  Now maybe there was not a statute that said that specifically you cannot cut that kind of deal, but I think the definition of fiduciary duty is treating your investors similarly and not lying to the small investors and helping the big investors.  So I would say in that case if he had tried to put the hedge funds that were doing the market timing and gone after them and made them pay, that would have been completely unfair because they were just exploiting an advantage.  That is what they are paid to do, as Michael points out. 

The reason this country is great and why Wall Street makes money is lots of people spend their whole lives thinking of ways to take advantage of the system.  That is the point.  On the other hand, if you specifically have a fiduciary duty and you have signed up to invest money for Mom and Pop, nobody asked Putnam Investments to take the responsibility.  When Mom and Pop hand their money and deposit them in investments, they expect Putnam Investments not to go out and hand it over to Eddie Stern. 

I think Spitzer gets a bit of a bad rap on that one.  I think the analyst case in some ways was also problematic in that it was not clear that you could not publish rosy reports while simultaneously saying you hated the stock.  In the end, the companies did pay.  And, Michael, the Merrill Lynch fine was actually not coffee; it was paper clips.  The fine was what they spend on paper clips in a year.  (My gratitude to Gretchen Morgansen for discovering that.)

But at the same time, there was a lot of discomfort on Wall Street already long before Spitzer’s actions.  Harvey Pitt had actually convened a secret meeting of the heads of the 10 biggest investment banks.  This was about six months before Spitzer acted and he said, “Guys I want to give you six months to clean up your act.  If you do not clean this up and stop pushing tech stocks in a way that is really encouraging day trading, we are going to have to make you stop, and we will embarrass all of you in the process.”  What would have happened if Eliot Spitzer has not showed up with his Dinallo affidavit in the middle?  We will never know. 

Again, the banks all know this from a very industry-friendly regulator.  Harvey Pitt spent his whole life defending the industry and thinking about how to make what they did legal.  And he had told them it was a problem.  I mean, he had not done it in public and embarrassed them, but he had said you got a problem here. 

And actually, I wanted to correct one thing about the denial affidavit.  In the judge’s decision in the Milburg Weiss case, those were the people who had sued saying, “I did not buy stock from Merrill.  I did not have an account with Merrill.  I never got research reports from Merrill, but I saw Henry Blodgett on TV and therefore I deserve my money back.”  And he quite rightly said, “You do not deserve your money back.”  The people who did deserve their money back were the ones who actually were Merrill’s clients.  So the complete cheese ball, “I’m a more of a day trader and I lost my money by watching Henry Blodget on TV.”  Those people do not deserve any money.  I do not think Spitzer thought they should.  In fact, actually now that I think about it I covered that decision and I called Spitzer’s office and they said, “We are not really upset by this decision.  We do not actually think there is a real problem with it.”

They are not off the deep end at Spitzer’s office in some ways.  In some ways they are.  They have done, as the book documents, some things that I think people do not do in polite society.  For example, offered Steve Markowitz who was a hedge fund guy, and he was in trouble for late trading, which is trading after the market has closed in mutual funds.  He had been warned by his own company lawyer to stop doing it.  His own company said, “We think what you are doing is illegal.”  As he later admitted, he fell off the wagon and started doing it again secretly.  So when Spitzer’s people came calling, his hedge fund threw him over the boat and said, “You have him.”  But Spitzer’s office said to Steve Markowitz, “You will plead guilty tomorrow at 9 AM or we will come and arrest you in front of your pregnant wife.”  Steve Markowitz did plead guilty, but I think a lot of people would say that is pretty jack boot.  On the other hand, it is not uncommon for people who are poor and other kinds of criminals, non-white collar criminals to be treated like that all the time.  There is a lot of “You will plead guilty, or we will throw your mother in jail, or we will take away your mother’s public housing if you do not plead guilty.” 

This I’m sort of digressing from the question, I apologize, but the concern about prosecutorial over-reaching and threatening, I think it is question we should all be asking about all of society, not just what Eliot Spitzer does to Marsha McLennan, or Eliot Spitzer does to hedge fund trader Markowitz, but what Chesterfield County Prosecutor does to drug dealer Smith.  Now, drug dealer Smith probably is guilty.  We all say that he is probably guilty; it is not so bad.  But Marsh McLennan is probably guilty.  They just have better lawyers. 

William Pryor:  The contrast that you raise with the Harvey Pitt was an interesting one.  I mean bringing the industry heads together and saying, “Clean up your act or we are going to do something about this and we are going to write rules” is different from pretending that there is a rule and saying, “You are going to pay for it and, oh, we are going to write rules to make sure you do not do it again.”  Isn’t that the real contrast and philosophy that really makes Eliot Spitzer different from some others?

Brooke Masters:  Yes, but I think a lot of it is where you sit or depends where you stand, because I think Spitzer, if he were in Harvey Pitt’s seat, will be writing rules.  He is well aware that it would be better to deal with rules.  He just does not have that ability.  He is having a political disagreement with the leadership of this country and he is doing it very cleverly through prosecutorial cases, but I think that is fundamental, what is going on.  If there were Democrats in-charge who shared his philosophy, I think they would be writing rules at the SEC. 

Michael Greve:  I’m not sure whether we have a disagreement here but I am nervous about prosecutorial abuse across the board.  With one caveat, there is one real distinction between drug cases and violent crime cases and these white-collar crime cases, and that is when you destroy a drug ring, or when you put some murderer behind bars, you are not inflicting a social loss.  Whereas, what you are talking about on these kinds of cases where you have criminal prosecutions of whether it is of Anderson or Marsh McLennan, there is an ongoing business that right in itself has some social values.  So naturally the prosecutorial judgments are much, much difficult it seems to me in that area and much more complicated and multi-dimensional than they are when prosecutors’ activities are directed against targets that have no redeeming social value at all.

Brooke Masters:  Unless they happen to be innocent.  And that is the social value that when you use prosecutorial misconduct to convict somebody - for example, I covered a couple of cases where innocent guys pleaded guilty to crimes that they did not commit because they were scared they were going to get the death penalty.  On the other hand, I completely agree with you.  I think the Thompson Memo and the things that have happened because of it are equally scary.  And just having covered the death penalty before I covered white-collar crime, I do not disagree with you in the [indiscernible].  What happened to Marsh with 10,000 people losing their jobs was pretty bad.  There had to have been a better way to handle it, frankly.

William Pryor:  I was wondering if you could talk a little bit more about an interesting part of the book, a part at least I found interesting, the colorful personality of Eliot Spitzer.  I was particularly amused by a description of a meeting of the National Association of Attorneys General in California.  I remember that meeting.  I do not know that you need to tell everybody, particularly our television audience, about some of those exchanges.  But particularly, one of the criticisms of General Spitzer has been how well he will play well with others, and you have some anecdotes about that.  I was wondering if you could perhaps enlighten us about some of that.

Brooke Masters:  We’ll start with the NAAG meeting, which I have to say was incredibly funny.   And probably you could tell it better because you were actually there.  I just talked to people who saw it.  What happened was, through some happenstance, the National Association for Attorneys General had extra cash leftover from the tobacco settlements, and there was a proposal to use that leftover money to build a new building.

Spitzer thought this was really stupid and they ought to spend it on healthcare.  He was making a fairly legitimate argument that, in fact, this money was supposed to go for healthcare, and building a shiny new building was not such a good thing.  But the way he chose to go about it - and this is sort of classic Spitzer in some ways - is he did not go to the meeting right away.  It was a four-day meeting in California. Everybody else went and did all the boring part of the meeting, went through the committees, talked about everything. 

He shows up on the last day, having written this scathing memo about “How dare you build this building?  And by the way, I think it is really”--I do not know if he used the word “immoral,” but that was certainly the implication--“to have accepted a free trip to Disneyland for your families while you are here because after all, you all regulate Disney.  This is proof that you are compromising this institution.  You are taking trips from Disney, you are spending money on a building, you are all evil.” 

Bill Lockyer, who is the somewhat impetuous Attorney General of California, took exception, not surprisingly, to Spitzer’s memo and his presentation about how they were all corrupt.  They start to go at it and the voices are rising.  They are getting angrier and angrier.  Lockyer goes, “You want to step outside?”  And Spitzer says, “Go ahead, I’m from the Bronx.”  If you know anything about him, Spitzer is from Riverdale.  Riverdale is a leafy, extraordinarily expensive enclave, which is technically in the Bronx, but it is not the Bronx.  I guess they eventually did calm themselves down.  And the final vote, it was 30-1, I think.  If you noticed, that is 31 attorneys-general; there ought to be 19 other votes.  Everybody else who thought maybe they had agreed with Spitzer abstained, because they did not want to actually have taken his side after this ridiculous performance, which does raise a question of whether the guy can possibly govern a state as large and as fractious as New York. 

I think it really is an interesting question.  While we are telling silly Eliot Spitzer stories, I might as well tell the Sandy Weill birthday story, which is one of my absolute favorites.  Right after the research settlements, they had just done this huge settlement.  Citigroup has paid $400 million and neither admitted nor denied, but has allowed the SEC and Spitzer to allege, that they published fraudulent research, which was a step up from some of the other banks.  Three banks had to acknowledge their fraud and the other banks just had to acknowledge misleading research, I think.  Sandy Weill throws himself a really snazzy birthday party at Carnegie Hall, which is Weill Hall now.  Within Carnegie Hall, the auditorium is Weill Auditorium, and so he throws - I think Yo-Yo Ma is playing. 

Everybody who is anybody in New York goes to this birthday party, including Hillary Clinton and Bill Clinton and Pataki and Giuliani.  Everybody is there, but not Eliot Spitzer, it should be pointed out.  A couple of weeks later, the New York Stock Exchange announced they are going to put Sandy Weill on the Board as a representative of the public, because back then the New York Stock Exchange Board had public representatives and industry representatives.  Sandy Weill as a representative of the public is kind of an interesting theory, given that he is the head of Citigroup. 

And so Spitzer hears about it and goes nuts.  He was just like, “I cannot believe this,” and he gets his cell phone, calls Dick Grasso, who is the chairman of the New York Stock Exchange, and says, “I cannot believe this.  First, the birthday party and now this.”  And everybody, including Dick Grasso, who has heard that thinks, “Oh, he was really pissed that he did not get invited to the birthday party.”  Spitzer, however, insists that it is not that he was not invited to the birthday party.  He would not have gone anyway after all.  It was that “he should not have had the birthday party because after all, his institution had just admitted to fraud.”  I leave it to you to decide which. 

William Pryor:  Michael, would you not concede that Spitzer is both smart and somewhat complicated?  You mentioned that the bid-rigging clearly was illegal and something should have been done about it.  But the complaint for that very investigation initially came to the AG's office from the Washington Legal Foundation, which is widely regarded as a limited government, pro-capitalism, pro-free market group.

Michael Greve:  Yes.  Of course, there are, in any industry, lots of bad apples, probably more than Mr. Spitzer has found, and I’m perfectly ready to acknowledge that.  I hold no great belief in Wall Street or its industries.  I think the place is a cesspool.

My misgiving is about the use of prosecutorial discretion at both ends at the end of defining what the violation is, and at the end of defining what the remedy is.  It seems to me it is one thing to go after individual people which you ought to be doing, and it is a totally different thing to leverage individual proceedings and to threaten criminal indictments in order to reform entire industries, and you just say one additional thing about that prospect.  It is worrisome to me even that the SEC has no serious economists, at least not at the level of the Federal Trade Commission where, both for enforcement proceedings and for regulatory purposes, they really pay attention to the economists at the FTC, precisely because there are concerns over excessive enforcement, as well as under-enforcement. 

In the SEC, all the action is still where it was under Chairman Douglas, which is the Enforcement Division.  That is where everybody wants to work and that is where everybody earns his or her spurs and then goes into private industry.  And even that Commission got mapped several times now in the Court of Appeals because it had absolutely no basis for what they were trying to accomplish.  If you have these total rulemaking proceedings in the context of a criminal prosecution, or impending indictment without any economists present, without anybody present except the corporation that is under indictment or soon to be under indictment, and a bunch of clever lawyers from the AG office on the other hand-- if the entire so-called regulatory process is driven by the settlement incentives at one side or the other--I have no confidence in the result whatsoever.  It is not the way we ought to run our major industries. 

Brooke Masters:  I do not think we disagree much.  I think good regulatory proceedings with proper give-and-take work much better.  It has been interesting right after Spitzer revealed the late trading, where people were trading after hours illegally.  The SEC’s reaction was to promote a rule saying all orders must be in by 4:00.  You may not process later.  The reason that late trading had been allowed to happen is that there was late processing.  The Consumers’ Union went nuts because the people hurt most by that are small investors who use brokers, because it would have meant they would have had to put their orders in by 1:00 in order for their brokers to get everything in by 4:00.  And so because there was time for feedback and there was discussion, they had never put that rule forward.  Instead, they got an electronic time-stamping thing they are working on which they may or may not ever finish, but at least there was some thought …  and I completely agree.  A properly organized regulatory process with real give-and-take is clearly the way to go. 

I think the question is when a regulatory agency is captured or is demoralized and is not doing anything, then particularly in a place like Wall Street, where clearly these people make money by pushing the boundaries because they are supposed to - I mean my husband works on Wall Street.  Invariably he gets four calls at Sunday afternoon, and I hear him like, “Yes, you could do that but you could go to jail for it.” “No, I really do not think you want to do that.  Think about what the SEC would say.” 

But that is great.  They listen to him and they do not do it.  They think of some other more creative way that is not illegal.  I think in the late 90s until 2002, the SEC not only did not have economists, they did not have any decent lawyers practically.  There were some very nice people there but they had tremendous brain drain because, if you remember, everybody was making money hand-over-fist, and they were government lawyers.  And if you looked at turnover, the examiners who are the frontline people who looked for misbehavior, they are the ones who are sent out to the brokers and sent out to mutual funds to make sure everybody is playing nicely with others and treating their customers properly.  The average examiner had less than two years on the job because there had been such turnover and there had been such an explosion in the mutual fund industry. 

So the agency had no idea what it was doing and it had no idea what was going on.  In an ideal world, what we would have done is we would have seen all these problems developing and we would have staffed up and they would have done proper regulatory processes.  Instead, things went bad and I think the question is once things have gone bad, is it better to have Eliot Spitzer come in and at least kind of blow the whistle and stop it, or do you wait another three or four years while it kind of sorts itself out?  I think that is fundamentally an ideological choice.  Neither answer is a good one.  Which one is worse? 

William Pryor:  Do we have questions from the audience to open it up?  Now, before you rise to ask a question I ask that you identify yourself both by name and your affiliation.  Yes?

Question [Male Voice 1]:  My understanding is that New York has very high rates of Medicaid fraud running into the billions, and that the New York attorney general is charged with enforcing some of these provisions on Medicaid fraud.  New York has a much higher-than-average rate of Medicaid fraud.  I’m wondering to what extent Spitzer’s pursuing vaguely defined charges of fraud under things like the Martin Act might actually have distracted him from traditional functions, such as rooting out Medicaid fraud?

Brooke Masters:  We were actually just talking about this at lunch.  There are a couple of things.  New York actually has a lower rate of Medicaid fraud because they are not catching it.  You would expect in a Medicaid Fraud Program, the fraud rate, I think, is about five to ten percent.  That is just sort of endemic fraud, and New York actually has a much lower rate.  The assumption is not that the fraud does not exist, but that they have not found it. 

There are a couple of things going on.  In general, in most states, and New York is one of them, the Medicaid agency has its own fraud unit that refers cases to the Attorney General’s office, and so the Attorney General relies on that agency.  So there are two actors here.  The agency has clearly been doing a terrible job of referring cases.  I think the rap on Spitzer that is valid is he went out and found fraud in other places.  If he had this agency that was not referring cases, could he not have gone out and done it himself? 

I think you could certainly say that.  He has ramped up the investment protection unit from 12 lawyers to 40 in the course of doing the Wall Street cases.  He has 600 lawyers.  I do not think it would be impossible for him to do both, given that probably 300 lawyers are doing defensive cases, the state gets sued for a bus accident or the state’s law against gay marriage is challenged.  Those 300 are probably not available to him, but he did choose to put resources into developing Wall Street cases rather than starting out afresh through Medicaid.  If he had a good Medicaid fraud agency, the cases would have come to him and I think he would have prosecuted them.  He is not an idiot.  If the case comes, he will take it.  So I think there is some validity, but it is not entirely his fault. 

William Pryor:  Is it one of the differences, too, that a lot of the Medicaid cases are going to be smaller-dollar cases?  You are going to have a lot of routine, a lot of actors out there, whereas in the exercise of your discretion, if you have the choice between staffing up those kinds of investigations to handle lower-dollar amounts and very fact-intensive investigations versus some really big money for your time and energy of matters that deal with an entire industry, it is not surprising that he might choose one over the other.

Brooke Masters:  I think that is true.  Under the best of circumstances, a Medicaid fraud case is a $100,000 recovery at a time.  They are completely valid cases, and they need to be done. But it is true if you have one more lawyer and that one lawyer can either discover bid rigging and revamp the insurance industry, or get to a couple hundred thousand dollars of Medicaid, you can see the attraction of going for revamping the insurance industry. 

Jim DeLong:  I’m Jim DeLong from the Progress and Freedom Foundation.  I’m most impressed with Michael’s point about the almost whimsical restructuring, that he knows how this industry should be structured.  Brooke, when you interviewed him, what would he say in response to that point?

Brooke Masters:  It is funny.  He is of two minds.  One is “Yes, you have a point.  I do not know as much as other people.”  Then he would move on, like, “I woke up one morning and thought we need independent research.”  He is a smart enough guy, and he is keeping two contradictory thoughts in his head.  I think he would acknowledge that he does not have the expertise of the regulators and what he would say is, “With the research analyst settlement, I worked with Steve Cutler.”  Steve Cutler is the Director of Enforcement of the SEC, if you are not following the players that closely.  I tried to tap their expertise and actually, he has gotten better about it with the mutual fund settlement.  He left the SEC to do the restructuring.  He argued the numbers and the restitution stuff. 

He would say, “Okay, you must pay $650 million - in the case of Bank of America for example - to your investors.”  But even if the SEC sort of structured exactly how they were going to control the trading rules and that sort of thing, he did not try to add regulations for the mutual fund industry because by then he had realized that the SEC had more resources and more expertise.  At the same time, he would also say that there is something to be said for a fresh eye, that agencies get captured. Part of life is regulatory competition and he would see himself as regulatory competition.

Questioner:  Thank you for writing this very important book and for coming to speak to us at AEI.  I know very little about Eliot Spitzer but I want to learn more.  He reminds me of Roy Cohn and Senator McCarthy, from what little I know. I would like to ask three brief strange questions:  Did you in your research discover whether or not Eliot Spitzer served in the military?  Had there ever been any rumors that he has a drinking problem?  And also, what was his relationship with his father?

Brooke Masters:  I’ll take them in order.  He did not serve in the military.  He went to Princeton, Harvard Law School, and then started working.  He missed Vietnam entirely.  He gets out of college in 1979.  I have heard no rumors that he has had a drinking problem.  He freely admits to having tried marijuana in college, like everybody else did in the 1970s.  The best I could determine in college, which was probably the clearest place where you can start to see a drinking problem develop, everyone talks about him as a square, so I do not think he has any kind of substance abuse issues, best I could discover.  I mean, I was not in his medicine cabinet.

He has a very complicated relationship with his father.  Bernard Spitzer is an extraordinarily successful developer, who went from absolutely nothing on Manhattan’s Lower East Side, put himself through City University and became an engineer, decided engineering was boring, and decided to become a real estate developer.  Now if you walked down Fifth Avenue near the Metropolitan, about every other luxury building is a Bernard Spitzer building.  He is fabulously wealthy.  He has extraordinarily high standards.  He has three kids.  Emily is a lawyer here in town who has done public interest work, and she was very active in the Bar Association’s Legal Foundation.  Daniel is a brain surgeon. 

Eliot is the baby and has spent his whole life trying to keep up with his two brilliant older siblings.  The famous story that everyone tells over and over again, because it is just so unbelievable, is when he was about seven or eight, Eliot was playing monopoly with his dad and he gets in over his head.  I do not know about you but when my kid – I have a seven-year-old – when he starts to lose, I start to cheat until I lose.  I kind of feed him some money.  I lose a couple of properties.  Bernard Spitzer foreclosed on Eliot, and Eliot started to cry.  Bernard says to Eliot, “Now you know what happens when you borrow money and do not pay it back.”  That is his relationship with his dad.

William Pryor:  The question is what is the relationship of the Attorney General with the court system?  What is his track record?

Brooke Masters:  Mixed, I would say.  In all of these Wall Street cases, two cases have gone to trial.  The one criminal case is Ted Sihpol who was the one person Spitzer tried to put in jail, and he was acquitted.  There is a civil case involving spinning, which is this really complicated Wall Street practice of giving free shares in initial public offerings that are bound to go to potential clients from whom you would like to get business.  He brought this case that was widely ridiculed by my paper and every place else against five CEOs, including Bernie Ebbers and the head of Quest and a couple of other people, saying they should have to return those shares because basically they were taking bribes.  This was a form of bribery.  And everybody laughed at him.  Ebbers obviously got convicted. 

Nacchio from Quest settled this as part of his settlement - I forget who else has settled, but one guy, Clark McLeod, took him to trial.  I have to say I did not even cover it because I figured Spitzer would lose.  And he won, which is interesting.  It got almost no coverage, but he actually won this completely, I thought, crazy case.  And then the judge was going to be given the opportunity to determine damages, and they settled over the amount of damages.  But in the crucial question of whether it was illegal and whether it was fraud under the Martin Act, Spitzer won.  In Wall Street, there had not been a lot of other court cases. 

In terms of his other initiatives, early in his Attorney General career, he had this vision he was going to go after illegal gun traffic by suing the gun manufacturers, saying that they had to stop selling their guns to dealers who had a track record of having their guns end up in crimes, that they were basically responsible for street crimes by repeatedly selling guns to dealers whose guns ended up in crimes.  That went nowhere, completely toasted, tossed on the first occasion, got killed on appeal, did not even make it to the state’s highest court. 

His environmental cases are federal.  He and Richard Blumenthal in Connecticut have put together a series of coalitions to challenge generally the EPA but sometimes industry, usually power plants, on their smog regulations and global warming CO2 regulations.  His record has been pretty mixed.  He has lost some cases.  He won a couple of big ones, lost a couple of them.  In general, his records are mixed enough that he knows he is pushing legal boundaries, but he is winning enough of them that they are not beyond the pale or stupid. 

And then finally as a defender of the State of New York, where he spends the vast majority of his office’s time in terms of court, the State of New York does pretty well.  Actually, here is where his record is much more conservative than you would expect.  The State of New York, like many states, has been sued by inner-city parents because of the school funding formula, because obviously they spend more per pupil in rich districts than they do in poor districts.  And he has said early on, “Look, politically I do not like the school funding formula.  I think it should be changed, but I’m the Attorney General of the State of New York, so I will defend it.”  And he has defended it up and down in every appeal, and they have lost every time but he sticks with it, which is interesting.  If he were really purely out there to get votes, this is a complete loser for him.  It pisses the teachers’ union off.  It upsets everybody who is his natural constituent. 

Gay marriage is another interesting one.  Like many states, New York had a case seeking to force the state to recognize gay marriage.  Again Spitzer said, “Whatever I personally think, I have friends who are gay who want to get married, and I personally support it.  Again, I am the Attorney General of the State of New York.  I have to defend this law.  There is no room in our law for gay marriage.  It is pretty clear men and women get married.”  He won that one recently, got headlined about a month ago.

William Pryor Jr:  This was brokers and getting bids, fake bids, from insurance companies.

Brooke Masters:  Basically what would happen is the broker would say, “Okay, Insurance Company A, you are not going to win this time.  Please submit a bid of X amount.  Insurance Company B, you are going to win.  You submit X-1,” and that is not covered by the McCarran-Ferguson Act.  You cannot actually direct it, and it was bad enough that in one case they had e-mails where the insurance company guy is saying, “We had submitted our bid.  Marsh came back to us: ‘It is too low.’  We need to raise it.  The other company will not win.”

Bonnie Waddell:  My name is Bonnie Waddell.  I’m in the securities industry.  Beyond that it is probably better not to state any closer affiliation in asking a question about Eliot Spitzer. 

William Pryor:  And that makes me want to ask.

Bonnie Waddell:  You have all been generally pretty high-minded in terms of looking at the broader policy implications in these big cases - mutual funds, securities industry, that sort of thing.  But I am just riveted by this issue of his psychological pathology and his public persona as a self-righteous bully.  I’m wondering who is going to take him down and when that is going to happen.  You have not mentioned my favorite case, unless you did when I was a little bit late.  That is the case that was based on the disclosure, which is news to me and I think many of us, that the New York Stock Exchange is a public charity.  Apparently Mr. Spitzer was just shocked that people at the New York Stock Exchange were actually making a lot of money.  Out of that case came my hero in the Spitzer saga, Ken Langone.  He stood up and said, “Look, I’m not going to take it.  I’m not going to stand for what you are trying to do, Mr. Spitzer.”  I wish you would mention a little bit of that story, Brooke, and also John Whitehead - Who is John Whitehead?  What was the interchange that he had with Eliot Spitzer? - which I also think really delineates the man’s personality and what we might all be concerned about for the future.

Brooke Masters:  Let me do John Whitehead first because it is pretty quick.  John Whitehead is the former chairman of Goldman Sachs who, until very recently, headed the downtown re-development agency that is trying to rebuild around where the World Trade Center fell.  What happened with John Whitehead was he wrote an op-ed piece in the Wall Street Journal defending Hank Greenberg, who is the chairman of AIG, who had recently been forced out.  Spitzer picked up the phone and called Whitehead, and there is some dispute about what happened.  Whitehead says that Spitzer basically said, “I’m at war with Greenberg, and now I’m at war with you.” 

Spitzer says that is more than he actually said.  He does, however, acknowledge that he told Whitehead to keep his day job, and so clearly they had an angry exchange.  Whitehead was clearly horrified by it, and he is not the only person who talks about these exchanges where he gets yelled at by Eliot Spitzer.  The people who are always horrified by being yelled at by Eliot Spitzer are people who do not get yelled at.  They are Congresswoman Sue Kelly, they are Whitehead, general counsels of investment banks who are used to people being nice to them, and so I think he does have this habit of totally screaming at people. 

What is interesting about it is sometimes it is calculated.  I do not think the Whitehead incident was calculated, but there is another famous meeting where he summons all the general counsels of the investment banks and says, “You will sign this settlement by tonight at midnight,” or maybe it’s “tomorrow midnight,” I forget now.  “Or I will start filing more Martin Act affidavits and you will lose your market cap.”  What was interesting is the bank guys come out of it, “Oh my God, you cannot believe what just happened.”  All of their lawyers, most of whom know Spitzer from various other contexts, to a man, say he was acting.  He was so putting on a show.  He has a really horrible temper, but he can also act.

William Pryor:  What did they do then?

Brooke Masters:  They all signed, every single one of them signed.

William Pryor:  An offer they could not refuse.

Brooke Masters:  Yes.  Ken Langone, let me do Ken.  Ken Langone is the Board Member of the New York Stock Exchange who Spitzer blames for the $140 million pay package that Dick Grasso walked away with.  And on that, whether the New York Stock Exchange overpaid Grasso--it is actually not a bad legal case.  The New York Stock Exchange should not have been a not-for-profit.  It was a stupid idea to register the New York Stock Exchange as a not-for-profit, but they were, in fact, one.  They chose it; he did not.  So they should have been aware that New York has a law that says compensation at a not-for-profit organization must be reasonable, and $140 million and not-for-profit do not sound reasonable to most people.  So I think Grasso is in trouble when the case goes to trial.  I do not know for sure, but $140 million. 

On the other hand, he also accused Ken Langone, who was on the Board at the time of fraud for not telling the whole Board all the information that he knew, and that is a much weaker case.  Langone recently had a motion to throw the case out and it was not supported.  The judge ruled against him.

William Pryor:  Was there not a contrast between Grasso’s package and those of his predecessors? 

Brooke Masters:  Oh, there was an enormous contrast.  He got a $140 million retirement package.  It was not public back then because they said they did not have to disclose anything, but the best estimate anybody can come up with and this is Charlie Gasparino, who was then at the Wall Street Journal who knows pretty much all the Wall Street gossip.  Charlie estimated that Donaldson was making under a million and Grasso was making $15-20 million in his best years and also, they wrote the retirement package rules so that it would reflect his highest salary, which is not unfair, but you may remember when that package became public, every newspaper in the country said he should give the money back, except the Wall Street Journal.  But everybody was like, “Oh my God, this is the evil on Wall Street.” 

So it was not like Spitzer was not sort of part of a crowd.  Ken Langone has fought it back, and he actually has raised money for Spitzer’s opponent in the Democratic primary, and I have interviewed Ken a number of times.  He is very funny, and he is incredibly interesting, but I think that case is likely to end up in a split decision.  I do not think it is going to be a full-out loss for Spitzer that some people are hoping for, nor do I think it is likely to come out as a full-out win.  I think it is going to be more complicated than that.

William Pryor:  Next question, yes?  I was pointing at you.

Question [Male Voice 2]:  Do you think there will be another Mr. Spitzer?

Brooke Masters:  I would be inclined to say there will be some I-wish-I-were-Eliot-Spitzer type people who will file actions similar to his.  I think the chances that they will have the same kind of roaring success that he has had are very limited for a couple of reasons.  One is whatever you say about him, he is extraordinarily smart and he has surrounded himself with extraordinarily smart people.  New York has had no meaningful Democratic state-wide establishment, so a lot of the really bright people who would have otherwise been in state government went to the Attorney General’s office. 

Secondly, it is New York.  If North Dakota tries to sue, you basically say, “Okay, we will close shop in North Dakota and you do not have any jurisdiction.”  New York pretty much, whether or not you want to actually do business there, all your stock transactions go through New York.  He is in an unusual position that nobody can pick up and say New York has no jurisdiction. 

The third thing is I think part of the reason he has been so successful is because he tapped into the national mood right after the crash of the bubble and at a time when Enron was collapsing and WorldCom was collapsing, and Adelphia turned out to have all this stuff, and Tyco had the $80 million shower curtain or whatever that number was.  It really did seem like corporate America was wildly corrupt and so therefore he had popular support for even his more questionable maneuvers.  I do not see that mood happening again at least for a while.  At the same time, he also got lucky in that the national regulators were in a mode that, given the national mood, was inappropriate, I think.  Working with industry and finding cooperative solutions in many ways is great, but at the time when it seemed like the world was falling apart, he walked in and tapped into something. 

Michael Greve:  Yes, my short answer to your question is, I hope we will not see it again, but we will.  These things go in cycles, right?  Whenever you have a sort of very frothy market like we had in the late 1990s, you are going to see lots of bad stuff, people get careless, right?  And then sort of as the mood turns sour, there is always going to be somebody around who sort of rides that particular wave.  I think Brooke is entirely right that he was uniquely well-situated to do this because of the jurisdictional issues and several other issues. 

New York is one of the very few states – I believe there are only five – where financial matters of this sort are actually in the AG's jurisdiction.  Most states have fulltime professional securities regulators.  Those securities regulators, if you talk to them, they have a very different mindset.  They do not condone fraud but they have what Eliot Spitzer will call the conflict of interest.  They have a duty to maintain liquid markets as well as rooting out fraud, and so they are conflicted in precisely the same way, whereas in New York and other states - I think Massachusetts is one of them – the AG can afford to have a one-track mind because what happens to the market is not his concern.  “Where the missiles come down is not my department.”  So there is that factor. 

I would say one more thing, sort of the catching up and the legal system.  I once wrote a piece called “Free Eliot Spitzer.”  The general idea there was that if you got a hold of the jurisdictional issues such that people could choose their own jurisdictions, just like we choose corporate law jurisdictions, corporations could sort themselves into jurisdictions.  Suppose brokerage houses worked like that?  Maybe brokerage houses would sort themselves into New York and want to do business there because Eliot Spitzer, that is a seal of approval.  So you can be safe off as an investor.  That will be through regulatory competition of the sort that I would actually embrace. 

Do you seriously think any sentient human being would want to do business in New York under those kinds of conditions?  Never.  That gives you sort of a fairly good sense of whether this has been good for investors.  Nobody, I assure you, would voluntarily choose that jurisdiction if they had a choice.  But they do not have a choice.

William Pryor: If Eliot Spitzer wins the governorship this fall, how would you like to be his successor as Attorney General?  He set a standard, whether you agree with it or disagree with it, in the Attorney General’s office in New York. What do you think it will be like for the next Attorney General of New York?

Brooke Masters:  I think it is going to be a really interesting thing because at the moment, it looks like we are getting Andrew Cuomo who is also a wildly ambitious man who, one could also say, has few limits on his view of his job.  He also has a history of bad blood with Eliot Spitzer.  It could be very entertaining.  I think it is interesting talking to securities lawyers around town, the white-collar folks, folks who have to deal with Eliot Spitzer on behalf of their clients.  Many of them are actually really worried because they would say, “Spitzer may be crazy but at least we know the limits of his craziness.  We know he wants industry change.” 

Spitzer is very proud of the fact that he has never indicted a corporation.  He does not want put companies out of business.  He may inflict a lot of pain on them but he has learned the Arthur Andersen lesson.  They do not know whether it is Mark Green, who is a perpetual office seeker in New York, who is very far-left even by New York standards, or Andrew Cuomo who now has boundless determination and ambition.  They do not know that either of those guys has any clue how the market works, whether they have learned the Arthur Andersen rule.  It is going to be really interesting.  It is hard to imagine the next attorney general could be anywhere near as interesting as Spitzer, but you never know. 

William Pryor:  Mike, do you have any concluding remarks that you would like to give? I will let Brooke wrap it up.

Michael Greve:  I think Brooke’s last point was very important.  At some level, it is a fairly unique experience, that is to say, here is a man who is very ambitious.  But he is also very smart and on top of it.  Every single one of his friends is an investment banker or has something to do with Wall Street.  He has sort of lived and breathed that kind of experience, that kind of culture from a very early age.  If somebody from a very different background, with very different experiences strolls in there, now that we know the instruments are around, they are going to be used and there is a certain expectation that they are going to be used.  That is a somewhat distressing experience to my mind because it is just very, very hard to put this particular genie back in the bottle.  What has been done can be done again.  That is, to my mind, a very big risk here.

Brooke Masters:  Yes.  My final word would be that I came away from writing this book with the sense that this is a guy that, whether or not he goes on to do more interesting things, is an important sort of icon in America.  And I do not mean icon in a positive way, but like standards that are in American politics right now.  To really understand a part of this country, I think you need to understand Eliot Spitzer and his appeal and his impact on all sort of little corners of this country. 

I’m always stunned by the fact that when I’m on airplanes people ask what you are doing because I sit there typing.  I’ll be flying to Minnesota where my in-laws live and they are like, “Eliot Spitzer, he is really cool.”  But this is some little old lady from the Twin Cities.  I bet she could not tell you her mutual fund name, but she knows Eliot Spitzer is protecting her money.  I think he is a really extraordinarily interesting guy, and I frankly cannot wait to see what happens next because I would like to write another edition.

William Pryor:  Will you please join me in thanking our panelists today.