Well, Eliot Spitzer has had better days at the office than yesterday.
First, Mr. Spitzer finally chose not to retry (persecute ?) former Bank of America Corp. broker Theodore Sihpol III, who was acquitted on 29 of 34 criminal charges relating to alleged improper trading of mutual funds in June and settled related civil charges with the Securities and Exchange Commission yesterday. The Lord of Regulation had announced a short time ago that that he planned to retry Mr. Sihpol on the charges. Here are the earlier posts on the Sihpol case.

In announcing the dismissal of the remaining charges against Mr. Sihpol, Mr. Spitzer’s office stated that the prosecution was no longer necessary because Mr. Spitzer was satisfied with terms of the SEC settlement and Mr. Sihpol’s statement in court relating to the charges. In his deal with the SEC, Mr. Sihpol agreed to pay $200,000 and be banned from the securities business for five years without admitting or denying wrongdoing. In state court, where the criminal charges were dismissed, Mr. Sihpol said: “I now recognize and regret that my conduct helped give Canary Capital an unfair trading advantage over other Bank of America mutual-fund shareholders.”
Mr. Spitzer and the SEC had alleged that Mr. Sihpol played a key role in allowing hedge fund Canary Capital Partners to receive same-day pricing of fund shares on trades made after the deadline of 4 p.m. Eastern time. Mr. Spitzer thought he had a layup in prosecuting the relatively young Mr. Sihpol, in part because of recorded telephone conversations between Mr. Sihpol and Canary traders that showed that Mr. Sihpol knew about the late trading and the testimony of two key Canary executives against him. Those Canary witnesses had previously bartered their testimony against Mr. Sihpol for a deal with Mr. Spitzer in which they avoided criminal prosecution and paid a fine without admitting or denying wrongdoing.
But Mr. Spitzer has always been more about bludgeoning corporate defendants into coughing up money to avoid the courtroom than actually proving anything in the courtroom. During Mr. Sihpol’s trial, Mr. Spitzer’s case unraveled quickly as Mr. Sihpol’s lawyers pointed out that Mr. Sihpol did not believe that the late-trading was improper and that his superiors at Bank of America — which had also kowtowed to Mr. Spitzer in a previous settlement — knew about it.
Although Mr. Spitzer has promised to “continue to vigorously defend the interests of investors,” (and to use the publicity in doing so to promote his political campaigns), some targets are becoming more willing to fight back. Last month, J. & W. Seligman & Co. sued Mr. Spitzer and alleged that he exceeded his authority by launching an investigation into the supposedly excessive advisory fees that the firm charges its mutual fund customers. The investigation began when Seligman refused to agree to Mr. Spitzer’s terms (extortion?) for settling his allegations that the firm allowed improper trading in its mutual funds.
Meanwhile, in another courtroom in Manhattan yesterday, Mr. Spitzer was dealt another embarrassing blow by U.S. District Judge Sidney Stein who thankfully barred Spitzer’s office from issuing subpoenas or bringing enforcement actions in his effort to damage the sub-prime mortgage market under the guise of investigating possible racial discrimination in residential-lending practices at national banks.
The Office of the Comptroller of the Currency and the Clearing House Association, a commercial-banking group, had sued Mr. Spitzer earlier this year, alleging that his investigation infringed on the OCC’s regulatory role over national banks. Judge Stein has been sympathetic to the OCC’s lawsuit and yesterday ordered Mr. Spitzer’s office to cease and desist its transparently political investigation into “discriminatory” sub-prime mortgage lending. In so doing, Judge Stein permanently barred Mr. Spitzer from subpoenaing documents from, or bringing enforcement actions against, national banks with regard to his investigation (campaign commercials?).
This ruling is particularly satisfying in that it halts Mr. Spitzer from pursuing a disingenuous political agenda that hurts a market that helps many of the voters that he is attempting to attract. Over the years, the sub-prime mortgage market has developed as national banks have gotten better at pricing risk-based loans. Thus, people who would not be creditworthy for conventional mortgages are now able to get a home loan, although at a higher price that reflects the greater risk of loaning money to folks who do not have the credit to buy a conventional mortgage. A significant number of sub-prime loans are made to members of minority groups, but without such risk-based pricing, the members of those groups with bad credit would never have received a mortgage in the first place. So, while cloaking his investigation in the veneer of fighting racial discrimination to play up to voters from minority groups, Mr. Spitzer’s probe into sub-prime lending practices is really just a front for buying cheap campaign publicity at the expense of a market that helps the very voters he is attempting to attract.
Given how most entities cower at the thought of doing battle with Mr. Spitzer in the courtroom, the OCC’s decision to stand up and pin back the Lord of Regulation’s ears back — and preserve a valuable market in the meantime — is refreshing.