A Post-Spitzer Wall Street

It's still two years off, but wrongdoers must be looking forward.
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There could be a hitch in Wall Street's step this New Year's Eve. Yes, Eliot Spitzer is running for governor of New York. But the crusading prosecutor isn't ready to turn in his sheriff's badge just yet.

Spitzer, the New York attorney general, vows to continue chasing down wrongdoers in the securities and insurance industries for the next two years. This comes even as signs emerge that federal authorities are starting to hold their own at the same game.



is getting more inquisitive and aggressive," the 45-year-old Democrat said in a recent interview. "Someone else will replace me, but for the next two years I'm pursuing this job just as diligently as the prior six."

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For a brief moment, it appeared Spitzer had delivered a Christmas Day gift to Wall Street, when

The New York Times

reported Spitzer was planning to cede some of his turf to the

Securities and Exchange Commission

. But the gift turned to coal when Spitzer's office issued a press release repudiating much of the story, saying it's absurd to suggest he "has somehow altered his views on the role of his office in confronting corporate fraud."

Still, the question remains of what will happen to securities regulation in the absence of a man who has wrung more than $4 billion in fines and restitution from Wall Street.

For his part, Spitzer himself isn't worried about any regulatory vacuum if he moves onto the governor's mansion in Albany, especially now that the SEC is once again willing to show its teeth.

"I don't think there will be a void," he says. "There are a significant number of prosecutors doing the sort of cases we've been involved in."

But other observers don't see another regulator with Spitzer's tenacity coming along anytime soon, particularly to an attorney general's office that historically has spent more time rooting out consumer scams rather than Wall Street ones.

"If you are looking for headlines, there are easier ways to get them," says Jill Fisch, a securities professor at Fordham University School of Law. "You need someone not just with the appetite for the limelight but the knowledge and interest in pursuing something that is a substantively difficult area."

To be sure, Spitzer isn't the first state regulator to take on Wall Street. In fact, the states have a long history of pursuing securities fraud and rogue brokers.

His predecessor, Dennis Vacco, brought several enforcement actions against small New York brokerages that scammed investors. Massachusetts Secretary of the Commonwealth William Galvin has brought his own enforcement actions against

Morgan Stanley



Franklin Templeton

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in the mutual fund scandal.

What distinguishes Spitzer from his peers has been an ability to identify big issues that affect a broad swath of investors. Rather than approach securities regulation on a case-by-case basis, he's gone after problems that affect all of Wall Street. He's also shown a willingness to take a fresh look at entrenched business practices that other regulators never thought to disturb.

"Spitzer clearly brought a different perspective," says Fisch. "He has been a catalyst in terms of making us rethink the appropriateness of standard operating practices."

In a best-case scenario, Spitzer's departure from the Wall Street scene would be an opportunity for the SEC to reclaim some of its lost prestige. The commission always has gotten high marks for pursuing typical securities crimes such as insider trading cases. But the SEC was embarrassed in the mutual fund investigation, in which Spitzer targeted trading abuses that largely everyone on Wall Street already knew about but chose to ignore.

For much of the past two years, the SEC has found itself playing catch-up to the New York regulator. Its efforts to become proactive in smoking out potential problems have borne some fruit. Spitzer says he's glad to see the SEC is no longer simply "waiting for cases to be brought to them." But the agency still remains obscure to the public in a way that Spitzer no longer is.

Among other things, the SEC remains hampered by an inability to move quickly on investigations. It's not uncommon for an enforcement action to be brought years after an SEC investigation is opened. Even after the agency formally notifies a company that it's likely to face charges, lawyers say it can take up until two years for federal regulators to either settle the case or file a lawsuit.

Former SEC officials say decisions to pursue enforcement actions sometimes get ensnared in internal politics, with the lawyers who work on the investigation pushing for tough penalties and the commission's top brass advocating less-onerous settlement terms. Other times cases just move slowly because a regulator's attention is divided between several matters.

On Wall Street, where speed is everything, the SEC's plodding nature often is interpreted as a sign of weakness and lack of seriousness.

In the mutual fund probe, for instance, investors have tended to give short shrift to matters being investigated solely by the SEC, as opposed to a joint investigation with Spitzer's office. Shares of

Bear Stearns


are up more than 30% since the SEC notified the brokerage in June that it's considering bringing an enforcement action against the firm and its big trade-clearing operation.

But to date, the SEC has taken no action against Bear. That's led most brokerage analysts and investors to surmise that the inquiry is much ado about nothing and that, at worst, it will result in a manageable fine.

"I have a lot of sympathy for trying to get things right, and I'm concerned when agencies move too fast," says Donald Langevoort, a securities law professor at Georgetown University School of Law. "But

Spitzer has showed the virtues of aggressiveness and prompted the SEC to rethink the ways it can get on top of matters more quickly."

Still, speed is a relative thing when it comes to the SEC.

If it's not the SEC, it's possible another state attorney general could try to follow Spitzer's lead. Indeed, in the insurance investigation, other state regulators were quick to jump on the Spitzer bandwagon by sending out their own round of subpoenas.

But a New York attorney general has several legal advantages in pursuing securities issues that other state regulators lack. Namely, Spitzer has the option of either filing criminal or civil charges against companies and individuals. The SEC only can file civil charges in a securities case.

Throughout his tenure, Spitzer has shrewdly used the threat of criminal prosecution to extract hefty settlements from the firms and corporate executives he's targeted. Spitzer played the criminal card to perfection in his recent pursuit of Jeffrey Greenberg,

Marsh & McLennan's

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former chairman and CEO. The New York prosecutor waited until Marsh's board forced Greenberg to resign before saying he wouldn't consider filing criminal charges against the nation's biggest insurance broker. Spitzer dangled the threat of criminal charges after filing a civil fraud suit against Marsh, accusing the insurance broker of rigging bids and accepting hundreds of millions of dollars in kickbacks for steering work to a select group of insurers.

To date, it's not clear whether Spitzer ever really intended to prosecute Marsh criminally, in addition to the civil fraud charges his office had filed. All that matters, however, is that Marsh's board took the threat to heart.

"Part of

Spitzer's legacy is that the SEC was embarrassed because he did something about these scandals before they did," says James Angel, a professor at the Georgetown University McDonough School of Business. "Part of the industry's reaction to Spitzer has been, 'We thought all this stuff was legal because the SEC didn't do anything about it.'"

Truth be told, Spitzer's bark has been a lot worse than his bite when it comes to pursuing criminal charges against Wall Street crooks. To date, Spitzer's office has either filed criminal charges against or secured guilty pleas from 13 people, none of them particularly well-known figures. However, in the still-unfolding insurance scandal, Spitzer's office has been more aggressive, taking guilty pleas from five insurance employees and promising much more.

Given the built-in advantage a New York attorney general has, it seems logical that Spitzer's successor would be the one to continue his Wall Street crusade. But it's wrong to assume that Spitzer's successor would necessarily follow his footsteps.

Robert Abrams, New York's attorney general from 1979 to 1990, spent much of his time on consumer-protection issues and environmental protection. The signature case during Vacco's brief tenure was the


(MSFT) - Get Report

antitrust litigation, in which New York took a leading role among the various states suing the software giant.

But even if a Spitzer clone were to emerge on the scene, it's by no means certain a new regulator would have as much success in getting Wall Street to pay up.

The drive for reform and retribution on Wall Street, just like stock prices, often goes in boom and bust cycles. It's difficult to maintain aggressive enforcement without some big scandal to shock the public. To a large extent, Spitzer has been fortunate that his tenure has coincided with some of the biggest corporate scandals in decades. The frauds at




whetted the investing public's appetite for taking down the rich and powerful on Wall Street.

Even Spitzer concedes some of his success in prosecuting Wall Street could be attributed to being in the right place at the right time.

"There is a school of thought that argues the bubble and the bursting of the bubble created a moment that cried out for reclaiming the damage of the marketplace," says Spitzer. "These moments do come and go. I hope we are entering a period with fewer cases like this."

Of course, given the cyclical nature of scandal, that means events may conspire down the road to provide an opening for another aggressive and ambitious state politician looking to make a name for himself.

"Money attracts thieves just like banks attract bank robbers," says Angel. "The criminal element is always going to be thinking 'How could I put money into my pocket?' That's why we need good regulators. It's a never-ending game of cat and mouse."