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April 19, 2005

The Lord of Regulation's abuse of power

SpitzerC.jpgIn this Wall Street Journal ($) op-ed, Chief Executive magazine editor William J. Holstein addresses a common theme of this blog -- namely, the dubious motives and methods behind New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot's Spitzer's multiple investigations into alleged business corruption. Here is a sampling of posts over the past year regarding Mr. Spitzer's abuse of power.

Addressing Mr. Spitzer's heavy-handed treatment of former AIG chairman and CEO Maurice Greenberg and his son, Jeff, the former Marsh & McClennan CEO, Mr. Holstein notes the following:

Mr. Spitzer has charged in and discovered a pattern of practices he doesn't like. He is applying a new set of values to reinsurance practices that had been in place for years . . .

Reflecting their dismay at the high-handed conduct of King George, the Founding Fathers created a judicial system with a stringent set of procedural safeguards to protect against overzealous or arbitrary prosecution. Yet in the atmosphere that Mr. Spitzer has helped create, the presumption is that CEOs are guilty -- if Eliot Spitzer says they're guilty.

Then Mr. Holstein turns to the specific "charges" that Mr. Spitzer has made publicly to prompt AIG to can Mr. Greenberg:

In dispute in the AIG case are highly complex transactions that may have reduced the company's shareholder equity of $82.9 billion by as much as 2%. It's not yet known if the total losses will reach that level, nor if they were material to AIG as a whole. After Mr. Greenberg's departure, the board ran up the white flag to Attorney General Spitzer and declared the transactions "improper."

Were they? One proper way to resolve this would be to create a policy framework with clear rules, which does not currently exist. Another way would have been for the Securities and Exchange Commission to negotiate an earnings restatement with AIG.

But Mr. Spitzer reportedly threatened a criminal indictment, which in effect would have put AIG out of business. Then he went on television to pronounce that the AIG transactions were "wrong" and "illegal," . . . It's not yet clear what the charges are. Nor has Mr. Spitzer heard Mr. Greenberg's side of the story.

So the New York attorney general both charges and convicts in the court of public opinion.

Then, Mr. Holstein bores in on the hypocritical nature of Mr. Spitzer's self-righteous campaign against business executives:

Mr. Spitzer's political ambitions are increasingly clear. He wants to use his record to become governor of New York. Mr. Spitzer's campaign office even paid Google to link a search for "AIG" to a Web site promoting his campaign before it was quickly taken down. In the same television show where he discussed the AIG case, Mr. Spitzer said he was "very close" to presidential hopeful Hillary Clinton and didn't rule out a run for the vice presidency or presidency.

Mr. Spitzer has thus created a reasonable doubt about whether he is using the legal process for political gain. An attorney general running for higher office is different than a senator running because it creates a risk that the legal system becomes politicized and is no longer seen as adhering to principles of fair play and due process. . .

Ironically, the cornerstone of Mr. Spitzer's actions has been an attack on conflicts of interest and cozy relationships that had long been tolerated. He is attempting to create a new ethical standard. Yet he has turned a blind eye to his own ethical problem.

The existence of business fraud at companies such as Enron, WorldCom, Tyco and maybe even AIG does not necessarily mean that there is more misconduct in big business than in any other relatively large organization, such as big government. Nevertheless, Mr. Spitzer and other prosecutors are publicizing these instances of business fraud to generalize arbitrarily against those who are easy and popular targets -- i.e., wealthy and apparently greedy businessmen.

That tactic plays well with the mainstream media, which enjoys portraying the morality play of Mr. Spitzer as the defender of noble egalitarianism fighting against the forces of corrupt capitalism. In the wake of such seemingly simple stories, many complex structured finance transactions -- which most prosecutors and journalists do not understand and do not perform the homework necessary to understand -- are unfairly and incorrectly portrayed as complex business frauds despite the fact that such transactions are beneficial to shareholders of the company and have been reviewed and approved by multiple professionals who are experts in such transactions. Moreover, with the inviting prospect of greater political rewards resulting from the favorable publicity, prosecutors such as Mr. Spitzer have dispensed with any notion of prosecutorial discretion in regard to investigating business executives over such transactions.

And for those who would respond -- "So what's the big deal? What's the problem with eroding the rule of law a bit to nail a few greedy business executives?" -- I would remind them of Sir Thomas More's advice to young lawyer Will Roper in the great movie, A Man for All Seasons. After Roper opines that it is acceptable to abuse the rule of law in order to achieve the laudable goal of prosecuting the Devil, Sir Thomas responds:

"Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down -- and you're just the man to do it, Roper! -- do you really think you could stand upright in the winds that would blow then?"

"Yes, I'd give the Devil the benefit of law, for my own safety's sake!"

Folks, even greedy business executives are entitled to the protection of due process in the face of the overwhelming power of government. Not only for their protection, but for ours.

Posted by Tom at April 19, 2005 5:20 AM |


Question - does Spitzer assume a fiduciary role once he starts an investigation such as Marsh & AIG. He literally controls the market place with his actions, i.e. stock value, lost jobs - by his threats of corporate indictment. Can we hold him responsible for all the little people who suffer as a result of his heavy handed tactics.

Posted by: IN THE TANK at April 19, 2005 7:22 AM

Under the Tank, nice thought, but I'm afraid that holding Spitzer responsible for deflating a company's stock price falls under the defense of sovreign immunity or "you can't sue City Hall"

Posted by: Tom K at April 19, 2005 11:43 AM


I understand your point but to use "the hammer", corporate indictment, which he has said in the past, is just a way to get a coporation off the dime so to speak, is a mis-use of his authority -- or do I just need to run for Govenor myself !

Posted by: IN THE TANK at April 19, 2005 1:29 PM

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