What Wall Street Misread

The events at Refco speak volumes about the value of due diligence on Wall Street.

Eliot the Conquerer

Coming into 2005, Eliot Spitzer seemed invincible.

The New York attorney general was winning kudos for his aggressive attack on Wall Street chicanery. Best of all, the praise was coming as the New York Democrat made official what everyone had known for months: that he was running for governor of New York in 2006.

In short, Spitzer could do no wrong, and the only questions he faced concerned which industry he would next bring to its knees. He seemed like a shoo-in for the governor's office. But a funny thing happened on the way to the coronation. Spitzer stumbled.

Ironically, it wasn't some lion of Wall Street like Citigroup's(C Quote - Cramer on C - Stock Picks) Sandy Weill who humbled Spitzer. It was Ted Sihpol, a small-time Bank of America(BAC Quote - Cramer on BAC - Stock Picks) broker whose biggest client was Edward Stern's Canary Capital hedge fund, a central player in the mutual fund trading scandal.

In June, a New York jury acquitted Sihpol on 29 felony counts of larceny, falsifying business records and other offenses related to mutual fund trading. The jury said it didn't believe that Sihpol should have been singled out for prosecution. They also didn't think much of Stern, the prosecution's star witness, who paid a $40 million civil penalty and was allowed to walk away from the scandal.

The acquittal was a big blow for Spitzer, and it led him to backpedal in several other pending criminal cases. In August, he let two other people charged in the mutual fund investigation plead guilty to felony charges in return for probationary sentences. Paul Flynn, the lone investment banker arrested and charged in the scandal, got a better deal. Spitzer's office dropped all charges against the former Canadian Imperial Bank of Commerce(BCM Quote - Cramer on BCM - Stock Picks) banker in November.

Quick on the heels of the Flynn dismissal, Spitzer let it be known that he had no intention of criminally prosecuting AIG's Greenberg.

Spitzer's decision not to criminally charge Greenberg no doubt emboldened the insurance industry patriarch and led to his vow to support Spitzer's political opponents.

In his seven years as New York attorney general, Spitzer has done a lot of good. But along the way, critics say, he's also trampled on due process rights and occasionally shown himself to be a bully. In 2005, the bully tasted humility.

Scrushy in Chains

Back in January, if you had to name someone who looked destined to spend Christmas 2005 in jail, Richard Scrushy was your man.

After years of suspicion, federal prosecutors had finally unmasked a swindler so adept at image manipulation that he got Wall Street to value HealthSouth(HLSH Quote - Cramer on HLSH - Stock Picks) at more than $5 billion just weeks before it collapsed in one of 2003's most celebrated accounting frauds. With guilty pleas in hand from more than a dozen alleged accomplices, government lawyers just had to show up at the courthouse to put Scrushy away, right?

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