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Eliot Spitzer: Ayatollah General

Eliot Spitzer: Ayatollah General

12 Mins
April 1, 2005

Eliot Spitzer became the attorney general of New York in 1999. In addition to carrying out the routine functions of that office, he has used a broad anti-fraud statute to conduct a series of aggressive and well-publicized campaigns against businesses, most notably in the financial industry. His purpose in these campaigns has not been the narrow one of punishing law-breakers.

Rather, he has sought a sweeping restructuring of the business landscape in order to make it accord with his moral vision, as though he were a religious dictator suddenly transplanted from the Middle East to Manhattan.

Last December, Spitzer announced that he is seeking to become governor of New York in the 2006 election. Should he succeed, his status as a large-state governor will instantly bring him attention as a possible presidential candidate. Indeed, the talk has already begun. Mark A. Hofman, senior editor of Business Insurance, wrote this about audience reaction to a speech Spitzer gave in Washington last January: "Many of those listening to Mr. Spitzer at that Press Club luncheon couldn't help wonder if the gaze he fixed on the audience wasn't really directed about three blocks due west on a certain white mansion." (1) Even earlier, Spitzer's father had been asked if his son would like to be president. His answer: "I think he would. It's his very nature." (2)

Before it is too late, then, the American public deserves to know: Who is Eliot Spitzer?


Born in 1959, Spitzer is the youngest child of real-estate tycoon Bernard Spitzer. Eliot's older brother, Daniel, is a neurosurgeon in New York's Westchester County; his sister, Emily, is executive director of the District of Columbia Bar Foundation, which raises funds for legal-services organizations. The Spitzer children grew up in the fashionable Riverdale section of New York, although to sound tough Spitzer sometimes says "the Bronx," which is technically correct. The boys attended the elite Horace Mann School, and Emily the elite girls school, Brearley.

In 1977, Spitzer went on to Princeton's Woodrow Wilson School of Public and International Affairs, established a good academic record, and was elected president of the student body. From that post, he assailed the university over divestiture and over higher wages for campus service workers. While attending Princeton, Spitzer spent part of a summer working as a laborer in the South and also traveled to upstate New York to pick tomatoes alongside migrant workers. "'I'd had a comfortable upbringing,' says Spitzer, 'so I wanted to experience harder work, to see the world from a different perspective.'" (3) Significantly, Spitzer did not spend his summer in sales or marketing—or trying to start a small business under the skeptical eye of local, state, and federal zoning, labor, and environmental regulators. (Most of his $1.46 million income in 2004, 87 percent, came from real estate he holds jointly with family members. (4) )

After graduating from Princeton in 1981, Spitzer went to Harvard Law, and the summer after his first year he worked for the New York attorney general's antitrust division, then headed by Lloyd Constantine.

"The Reagan Administration had deliberately abandoned antitrust laws," Constantine says. "They said it was a relic of the nineteenth century." With young Eliot Spitzer as an ardent team member, the New York attorney general's antitrust division tenaciously took on the feds. . . . It also became apparent that there was a deep professional bond between the two combative colleagues. "We both saw the law as an instrument for social change," says Constantine. (5)

Harvard Law professor Alan Dershowitz was also forming a favorable impression of Spitzer at approximately this time and recently said of him: "He has a creative and innovative mind, and he always wants to do what's right." (6)

Receiving his law degree in 1984, Spitzer clerked for U.S. district court judge Robert W. Sweet and then joined the firm of Paul, Weiss, Rifkind, Wharton & Garrison. Reportedly, he found the job "unfulfilling" (7) and left in less than two years. From 1986 to 1992, Spitzer worked for Manhattan district attorney Robert Morgenthau chasing mobsters. His most famous case involved Spitzer in setting up a fake sweatshop and waiting for it to be approached by racketeers. It was. "'We got great tapes there,' Spitzer says, 'with them saying, "Look, if you try to switch trucking companies, we'll break your legs," things like that.'" (8) So, for what crime did the prosecutors seek to punish these mobsters who were threatening to break legs? Was it for the obvious crime of intimidation, a crime amply evidenced? No, it was for the economic pseudo-crime of violating the antitrust laws—and the charges were plea-bargained.

The prosecutors then came up with a novel use of antitrust laws to indict two Gambino family members. But three weeks into their trial, Spitzer and Morgenthau agreed to an unusual deal: The defendants pleaded guilty, paid a $12 million fine and got out of the local trucking business. In return, they avoided prison. Using the law to change an industry's structure would become another Spitzer hallmark. (9)

In 1987, Spitzer married Silda Wall, whom he had met while they were attending Harvard Law. Although Wall came from a Methodist/Southern Baptist background and Spitzer from a Jewish one, that proved to be no hindrance to their union—and for a very instructive reason spelled out in the January 2005 Vanity Fair profile of Spitzer. Apparently, Spitzer's Jewishness is largely cultural; he was never bar mitzvahed, for example. But in matters of ethics, Spitzer's sister recalls, her observant-Jewish parents imparted "a sense of gratitude and also obligation." His father has said: "'We tried to teach them that it isn't enough just to make your own pile.'" (10) This altruism of the Spitzers was echoed in the ethical essence of Wall's Christian morality, which she describes as a need to "give back." And this shared altruist outlook was not a mere lip-service creed. Indeed, Wall says, a hit was "the values of our families" that attracted her and Spitzer to each other. In light of this deeply felt altruism, one can easily understand Spitzer's view of those who hold to a morality of self-interest and to its economic expression: capitalism.

After his work with Manhattan's district attorney, Spitzer returned very briefly to private practice (at Skadden, Arps, Slate, Meagher & Flom) but in 1994 made a sudden decision to run for New York attorney general. He finished fourth in a four-way Democratic primary. Spitzer next joined with Constantine and became a founding partner in "a boutique antitrust law firm," Constantine & Partners, now Constantine Cannon. (11) He also began planning for the 1998 election and another bid for power. This time, Spitzer crisscrossed the state repeatedly. (12) He won the primary handily, but the general election was much harder. Even the leftist New York Times was reluctant to endorse Spitzer editorially. It wrote: "Mr. Spitzer misled the public about how his father's wealth was used to support about $9 million in loans that financed his campaigns in 1994 and 1998." (13) In an interview with the New York Times, Spitzer declared: "What I have done absolutely complies with the law, and that is the critical issue here." (14) The Times's tepid endorsement commented: "His conduct may not be illegal, but it was clearly designed to circumvent laws." (15) Luckily for him, Spitzer did not face a prosecutor in his own image: one whose main concern is with "shameful" conduct—and who has a vague law that allows him to criminalize it. In the event, Spitzer won a tight race—it took six weeks for him to be declared the victor by 25,000 votes.


Writing recently in the conservative Weekly Standard, Matthew Continetti suggested that Spitzer brings no ideas to his pursuit of office. "The man is an empty vessel, into which flow the aspirations of liberals, the anxieties of businessmen, and the heroic narratives of idolators." (16) But is that correct? It may be true that Spitzer is not a policy wonk, but he does bring ideas to his public life. If political commentators do not notice these ideas, perhaps it is because they are moral ideas rather than political ideas. Spitzer has said of the methodology he would bring to the governorship: "'We're going to need someone who can say: "Wait a minute: Here's the problem, here are the facts, here are the value judgments, here's the way we apportion burdens in getting to answers."'" (17) To a policy analyst, that may sound vacuous. But what it seems to mean is: "I do not need a political ideology to guide me. Present me with the facts of a case and my moral ideals will tell me what the proper action is."

What value judgments does Spitzer bring to bear on cases?

At any rate, that is the approach Spitzer has taken during his tenure as attorney general. He has looked at the facts; he has applied his value judgments; then he has prescribed his remedies. And what value judgments does Spitzer bring to bear when "getting to answers"? In the case of business, he seems to begin with the moral principle that self-interested behavior, such as moneymaking, is at best a merely practical activity, and if not constrained by noblesse oblige a positively malign one. Like two New York governors before him, Theodore and Franklin Roosevelt, Spitzer therefore wages war against the self-seeking, moneymaking bourgeoisie in the name of the little guy. All he asks in return is ever more power to do so.

We see this moral outlook in his father's teaching that "it isn't enough just to make your own pile." We see it in his wife's remark that the "shared values" of their families involved "giving back." We see it also in Constantine's remark that, even as Spitzer was helping to found their law firm, he knew Spitzer would not be happy in private practice. (18) And we see it in the remark of David D. Brown IV, a Harvard Law grad, that he left Goldman Sachs to join Spitzer's office because he felt he had "totally sold out" by pursuing wealth. (19)

Most especially, though, we see this moral outlook in a story told by Spitzer's Princeton roommate, Bill Taylor: "I remember when he was president of the student government. I would be woken up by Eliot's late-night screaming matches with senior university administrators. Eliot had championed the cause of striking food service workers." (20) Anyone who recalls the sixties and seventies—when outraged students demanded vast institutional changes "NOW!"—will have no trouble understanding the appeal Eliot Spitzer has for baby-boomers. He has created an image for himself as America's chief anti-capitalist inquisitor, not because he has thrown a lot of businessmen in jail—he very notably has not. Rather, his image is based on his outraged insistence that businessmen have fallen below the standards of his own compassionate morality and must immediately start living up to them. When lawyers for Wall Street banks were negotiating with his office, Spitzer "lit into them. '[He] was harsh, irate, yelling at times,' one of the lawyers told Time. Spitzer said he was fed up with their haggling, that they should be ashamed of what they had done to investors." (21) Brown describes Spitzer's office this way: "Eliot has smart people thinking, in a predatory way, Where can we do good?" (22) Yes, predatory.

Spitzer's moral outlook has definite, discernible contours, and at its core are three elements that have shaped his crusades against business. First is an antipathy toward anything he perceives as greed. He may not be a socialist who wants to eliminate the pursuit of economic self-interest altogether, but he demands that self-interest be restrained and decorous—a necessary evil. Secondly, Spitzer is profoundly egalitarian in his outlook. He assumes that conflicts of interest between the classes are manifold, and the danger of exploitation constant. With that conviction, he invariably sides with workers and small investors against the wealthy and successful. Third, and worst of all, Spitzer is a Jacobin: he is willing to sacrifice the political principles of a free society—individual rights, the rule of law, and democratic processes—when they stand in the way of his moral views.

"Eliot has smart people thinking, in a predatory way, Where can we do good?"  -Attorney David D. Brown

In recent years, liberals have created a bugaboo of America's religious Right, finding in it the makings of a dictatorship of virtue, such as the Ayatollah Ruhollah Khomeini introduced after Iran's 1979 revolution. This is straining at gnats while swallowing a camel: to find a genuine threat from demagogic virtue-crats, liberals need look no further than the rise of their own Eliot Spitzer.


In order to enforce his morality, Spitzer frequently uses an old law that allows him to criminalize behavior not obviously illegal and, by threatening business executives with prison and economic ruination, mandate such reforms as may spring from his moral sense. The law that Spitzer has employed for these purposes is New York's 1921 Martin Act , as amended in the 1950s. (Formally, it is New York State's General Business Law, Article 23-A, which includes Sections 352-359. (23) ) One prosecutor says of the Martin Act: "It is one of the broadest anti-fraud statutes ever devised, at least in a democratic society." (24) According to Nicholas Thompson, senior editor of Legal Affairs:

It empowers [New York's attorney general] to subpoena any document he wants from anyone doing business in the state; to keep an investigation totally secret or to make it totally public; and to choose between filing civil or criminal charges whenever he wants. People called in for question during Martin Act investigations do not have a right to counsel or a right against self-incrimination. . . . Now for the scary part: To win a case, the AG doesn't have to prove that the defendant intended to defraud anyone, that a transaction took place, or that anyone actually was defrauded. (25)

This outrageous law survived during decades of improvements in defendants' rights principally because attorneys general had "by gentleman's agreement" used it only against the sleaziest frauds. (26) Spitzer and his colleagues make no such distinctions. Greed is greed and should be rooted out.

Of course, greed is not illegal, even under the Martin Act, but Spitzer can always count on anti-capitalist journalists to publicize any self-seeking behavior he uncovers through a Martin Act investigation. When the resulting bad publicity hammers the company's stock price, the temptation to negotiate becomes overwhelming. And when, as often happens, an executive appears to have run afoul of the Martin Act, the desire to defend economic liberty yields to the desire to preserve personal liberty. At that point, Spitzer unveils his deal: get gentle treatment for the company and its executives—in return for a thorough-going makeover of the entire industry in accordance with Spitzer's idea of the moral. The result: a leftist scheme—which in a free society could not have been imposed at all and in a democratic society would have faced years of debate—is achieved by one self-righteous prosecutor in a matter of months, weeks, or even days. As Fortune magazine wrote in a laudatory article: "What's truly stunning is [Spitzer's] ability to force reform—to root out institutionalized sleaziness with lightning speed. . . . Congress and federal regulatory agencies such as the SEC take years, if they're lucky, to shape an industry or reshape its basic practices. . . . Yet Spitzer, an elected official from a single state, has turned entire industries upside down." (27) In short: "Morality NOW!" Savonarola might have said just as much.

Indeed, completing the parallel with the Dominican zealot (who was also a popular hero in his day, we should remember), Spitzer not only makes business executives of targeted firms promise to reform, he also forces them to kiss the rod that has chastised them and confess that they have been moral failures, thus vindicating the superior virtue of Eliot Spitzer. Last year, evidently, one of Spitzer's corporate victims failed to appreciate how key is this ethical kowtow to Spitzer. According to the Wall Street Journal: "People privy to the talks say Marsh & McLennan has bristled at the potential statement of contrition." (28) Finally, Marsh understood that there was no way to end Spitzer's persecutions but through self-abasement and it agreed to call the behavior in question "shameful." (29)


In January 2005, Gretchen Morgenson, the New York Times's ferociously anti-business business reporter, used her newspaper column to give Spitzer a facetious award: "To Eliot Spitzer, the New York attorney general, for finding corruption in the third financial services industry in as many years. First it was Wall Street research, then the mutual fund industry. In 2004, it was the insurance business's turn." (30) The legal and economic specifics of these three cases cannot be examined here in anything like the detail they merit. I hope to take up each separately in future articles. The following analysis, however, gives the general outline of the three investigations and abstracts the overall approach that Spitzer takes. From that, we shall see how the approach emerges from the character and morality of Eliot Spitzer.

Wall Street Research. Acting on a hunch that Wall Street investment advice was biased, Spitzer used the Martin Act to demand innumerable e-mails from the firm of Merrill Lynch. On April 8, 2002, he issued a press release announcing that Merrill's analysts had "skewed" their stock ratings to win business for Merrill's investment-banking division and to punish firms that did not do business with it. (31) The most damning of the e-mails were tossed to a mob of anti-capitalist reporters with predictable results. "Merrill Lynch Stox Shocker" screamed the New York Post. (32)

Earlier that day, Spitzer's assistant Eric R. Dinallo had filed an affidavit with the New York Supreme Court seeking authority to gather further evidence for his investigation of analysts' hype. In setting forth the "statutory framework" under which Spitzer sought authority to seize records, Dinallo helpfully noted the beauties of the Martin Act: "It prohibits and makes illegal any fraud, misrepresentation, deception, concealment, promise or representation that is beyond reasonable expectation [in the New York securities industry]. . . . Unlike federal securities laws, no purchase or sale of stock is required, nor are intent, reliance, or damages required elements of a violation." (33) Bluntly, a person may be prosecuted for behavior often considered sinful (misrepresentation), even if there was no intent to defraud and even if no harm resulted. (34)

Over the next week, according to Charles Gasparino, the Wall Street Journal reporter who covered the case, "Merrill lost $5 billion in market value. By the end of the month, Merrill's stock declined $11 billion." (35) Shares dropped from 53.45 at the time of Spitzer's denunciation to 40.80 on May 7, a decline of 23.57 percent. The first three weeks of May showed little recovery in stock price, and on May 21 Merrill settled. (36)Time summed up the outcome: "Merrill agreed to pay the fine, apologize and reform the way it paid its analysts. . . . Some felt [Spitzer] was too lenient with Merrill, which can easily afford $100 million (average profit over the past three years: $2.35 billion). Moreover, no one went to jail." (37) On April 28, 2003, ten securities firms reached a so-called "global settlement" with federal and state officials, costing $1.4 billion and involving many new rules; two more firms settled the following year. (38)

The seven steps of a Spitzer inquisition were all present here in his first crackdown on the impious. (1) Business Utopianism. Denounce the realities of business, especially the pursuit of economic self-interest, as ethically sordid—in this case, denounce the reality that hustle and hype are the Brownian motion of commerce, from the rug merchants of the Middle East to the stockbrokers of Wall Street. (2) Universal Fiduciality. Ignore the rule of "caveat emptor" and the responsibility of market participants to look out for themselves. In the name of equality, insist that business leaders have a fiduciary responsibility to all their customers, investors, workers—indeed, to the public at large. Money magazine put this question to Spitzer directly: "What do you say to the public in the wake of all this? Do they also share some of the responsibility?" Spitzer's response: "I don't want to say the public shares responsibility."(39) The sleaziest lout could not perpetrate a greater fraud on the stock-buying public than the politician who assures them that government will save them from the effort of "caveat emptor." (3) The Bloody Shirt. Find a handful of acts that cross the line into inexcusable (though not necessarily illegal) behavior. In this case, Spitzer found a few e-mails where hype had passed into lying. (4) Extra-legal Punishment. Use these examples of deplorable (though perhaps legal) behavior to publicly smear and threaten an entire company and its top executives, putting it and them under a cloud and driving down the company's market value. (5) Play the Good Cop. Offer a lenient penalty in exchange for the right to dictate corporate policy. (6) Repeat as Needed. Use the above sequence of steps as often as necessary to restructure an entire industry in conformity with the morality of Eliot Spitzer.

But the final step is the true key to a Spitzer settlement. (7) A Virtue-cratic Takeover. Make it clear that Eliot Spitzer and his morally superior minions are now in charge. Executives may be allowed to pretend they are running their companies. Lawyers may be allowed to pretend that objective rules and regulations exist. But the hard truth is that the company or the industry must behave in ways the ayatollah general decides are ethical. When Fortune reporter Julie Schlosser interviewed Spitzer after the global settlement, they had the following exchange:

Schlosser: "The settlement bars analysts from banking-side sales pitches or road shows. Can their revenue and earnings estimates be mentioned during those meetings?"

Spitzer: "We are going to make it very clear to them that use of content by the investment bankers is not something we expect to be hearing about."

Schlosser: "You mean it won't be legal?"

Spitzer: "Let me leave it at that right now." (40)

So much for the law-governed market.

Spitzer's investigation of the mutual-fund industry showed the same pattern of using a few infractions to restructure an entire industy.

The Mutual Funds. Spitzer's investigation of the mutual-fund industry showed the same pattern of using a few infractions to restructure an entire industry in accordance with the Spitzer morality. This investigation began with a tip that Canary Capital, a hedge fund run by Edward Julius Stern—heir to the Hartz Mountain pet-supply business—was engaged in market timing and late trading with several mutual funds. (41)

Market timing means making short-term trades, and it is typically based on the fact that mutual funds establish the price of their shares once a day, conventionally at 4:00 p.m. Eastern time, when the New York Stock Exchange closes. If a given mutual fund holds overseas stocks in its portfolio, the prices set for the mutual-fund shares will reflect the prices at which those overseas stocks last closed. But because of time differences around the world, the overseas markets may have closed many hours ago. Since those overseas markets closed, events may have occurred (say, a rise in the U.S. stock market) that virtually guarantee the foreign stocks will open much higher than they closed. In such circumstances, the prices that are set for the mutual-fund shares at 4:00 p.m. Eastern time will be "stale," that is, the prices will not reflect the best current estimate of the shares' actual value because it will not reflect the best current estimate of the foreign shares' actual value. Under these circumstances, savvy investors may buy mutual-fund shares before the 4:00 p.m. close and sell them early the next day, at an almost certain profit.

There is nothing illegal about market timing. But for various reasons it is a practice discouraged by the prospectuses of many mutual funds. Nevertheless—the cardinal sin in egalitarian eyes—market timing is a practice sometimes permitted to a mutual fund's most important customers. With his characteristic business utopianism, Spitzer clearly saw such discrimination on behalf of good customers as sordid.

Late trading is a separate matter entirely. As noted above, mutual funds establish the price of their shares once a day, conventionally at 4:00 p.m. Eastern time, when the New York Stock Exchange closes. If a mutual fund allows a customer to engage in late trading, that means it allows him to buy, sell, or redeem mutual-fund shares after the price has been set at 4:00 p.m.—yet at that 4:00 p.m. price. Obviously, this allows the customer to take advantage of any news that has occurred since 4:00 p.m., and that is likely to affect the next day's price. Specifically, if news occurs after 4:00 p.m. that is virtually guaranteed to send the mutual funds' shares higher by the end of the next trading day, the customer who can engage in late trading is almost certain to make a profit by buying shares at today's 4:00 p.m. price. Therefore, late trading is directly contrary to a U.S. Securities and Exchange Commission (SEC) rule, Rule 22 c-1. (42) Nevertheless, certain mutual funds allowed Stern to engage in that practice as well. For Spitzer, this became the Bloody Shirt.

On September 3, 2003, Spitzer issued a press release: "State Investigation Reveals Mutual Fund Fraud." (43) Spitzer charged that Bank of America's Nations Funds (along with Banc One Investment Advisors, Janus Capital Corporation, and Strong Capital Management) had allowed Canary to engage in market timing and had even let it trade mutual-fund shares after hours. Again, the complaint filed in September with the supreme court of the State of New York sought punishment under the Martin Act:

A. That defendants be permanently restrained and enjoined from engaging in any fraudulent practices in violation of Article 23-A of the General Business Law.… C. That defendants pursuant to General Business Law Section 353 (3)…disgorge profits obtained and pay damages caused by the fraudulent acts complained of herein. (44)

What should we make of the charges? First, even though the SEC should not be allowed to tell mutual funds when their customers may make trades or at what price, late trading is a violation of an SEC rule. All right, let the SEC punish mutual funds that violate the rule. But mutual funds should not be threatened into accepting penalties imposed by the attorney general of New York because he wields an utterly vague law that he can use to ban people in the securities business from doing everything that he personally finds morally offensive.

What about the charge of permitting Canary to engage in market timing? A mutual fund that explicitly pledges not to allow market-timing transactions should be held to its contract and punished for violating it. But those who do not make such pledges explicitly and unambiguously—and Bank of America did not—should be allowed to seek higher profits by dealing with individual customers as they wish. The actual language in the Nations Funds' prospectus for Primary A shares was:

The interests of a Fund's long-term shareholders and its ability to manage investments may be adversely affected when its shares are repeatedly bought and sold in response to short-term market fluctuations -- also known as 'market timing.' The exchange privilege is not intended as a vehicle for market timing. Excessive exchange activity may interfere with portfolio management and have an adverse effect on all shareholders. When BA Advisors believes frequent trading would have a disruptive effect on a Fund's ability to manage its investments, a Fund may reject purchase orders and exchanges into a Fund by any person, group or account that is believed to be a market timer [italics added]. (45)

May. May. May. On this evidence, the Nations Funds did not make, and therefore did not break, an explicit pledge to its investors.

Now, some people might argue that the funds' pronouncements were unethical, if not illegal, for their tone encouraged unsuspecting people to assume that the Nations Funds would not permit market timing. If the pronouncements were indeed immoral, let industry watchdogs blacklist the funds; let business journalists damn them; let clients shun them; and let honorable citizens ostracize their executives. These are the proper methods for dealing with immoral people in a free society—the proper and urgently needed customs for dealing with immoral people—whether such people work in the sex trade or the securities industry. (46) What America does not need are ayatollahs bent on criminalizing turpitude.

Using late-trading and market-timing favoritism as his legal and publicity bludgeon, Spitzer reached a settlement that included a pledge by mutual-fund operators to cut fees

This particular Spitzer inquisition had an ending that might seem odd but is quite in keeping with Spitzer's policy of ending an inquisition with a virtue-cratic takeover of the industry. Using late-trading and market-timing favoritism as his legal and publicity bludgeon, Spitzer reached a settlement that included a pledge by mutual-fund operators to cut fees. Yes, cut fees. A professor of corporate law at the University of California, Los Angeles, Stephen Bainbridge, wrote, "It's as though you got busted for pot possession and the DA said you had to give up snowboarding." (47) The Wall Street Journal agreed: "Spitzer's settlement…metes out a punishment that is unrelated to the crime." (48) Even the SEC concurred: "This is a case about illegal market timing, not fees. Therefore, we see no legitimate basis for the Commission to act as a 'rate-setter' and determine how much mutual fund customers should pay for the services they receive in the future." (49) Of course, from Spitzer's point of view, the settlement made perfect sense: What was immoral about the mutual funds' behavior was that they had discriminated against the little guy; and now they must (by cutting fees) do penance by making reparations to little guys—even if not to the same little guys they slighted.

The Insurance Industry. Spitzer's third major inquisition rested on the fact that the field of insurance has three principal types of participants: those seeking insurance, insurers, and, between them, an insurance broker who brings them together. Many companies seeking insurance go to an insurance brokerage and pay it to find them an insurer. At the same time, would-be insurers seeking clients go to the insurance brokerage and pay it for directing clients to them. In short, the insurance broker is a middleman.

The insurance investigation also began with a tip. A letter received in April 2004 said that Marsh, the insurance brokerage unit of Marsh & McLennan, "is receiving major income for directing business to preferred providers/insurance markets." (50) In fact, according to the Wall Street Journal, "the fee arrangements date back several decades." Moreover, "the brokers say their practices are above-board and appropriate." (51) Because the commissions were a widely accepted practice, Spitzer's people needed something that sounded much worse—the Bloody Shirt—and in early September they found it: anti-competitive behavior. Essentially, the allegation was: Marsh would offer a bit of business to a specific insurance firm on terms determined by Marsh itself; it would then ask other insurance firms to enter bids offering insurance for the same business, only with higher premiums. In his press release, Spitzer said: "In addition to steering business to its insurance company partners, Marsh, at times, solicited fake bids, which deceived its customers into thinking that true competition had taken place." (52) Now, this is not the place to discuss bid rigging or the antitrust laws that forbid it. In any case, it is conceivable that Marsh may have owed an obligation to those seeking insurance not to engage in such acts.

But the practice Spitzer wished to stamp out was not bid rigging; it was the common practice of insurers making payments to brokers. On October 14, Spitzer filed a civil complaint against Marsh, once again under the Martin Act. (53) Within two days, Marsh had announced that it would no longer take incentive fees. (54) Within four trading days, Marsh's stock price plunged by nearly 50 percent, cutting the company's market value by $11.5 billion. (55) Other large insurance brokerages rushed to appease Spitzer, announcing that they too would halt the practice of accepting payments from insurers. Once again, the revolutionary zealot had upended an entire industry in less than a week. (56)

Why? What reason could be alleged for having Marsh and its competitors give up the practice of being paid by both sides when it acts as the middleman? Apparently, from the perspective of Spitzer's business utopianism and his desire to universalize fiduciality, such a role is inherently immoral, being based on an ineluctable conflict of interest. He cited in support of his position Marsh's statement: "Our guiding principle is to consider our client's best interest in all placements." (57) But what did clients see as their best interest? According to Alan Reynolds, a senior fellow with the Cato Institute, one fourth of property and casualty insurance is sold directly rather than through a broker. (58) If Marsh's clients, many of them large corporations, thought the contingency fee arrangement ended up costing them money, they had only to contract for insurance themselves. Perhaps, contrary to Spitzer's view of the matter, clients thought their "best interest" was served by sharing the expense of Marsh's services with the other partner to the transaction.

In any case, merely halting the practice of accepting contingency fees was not sufficient while Spitzer's moral outrage went unslaked. First, as part of his virtue-cratic takeover of the industry, he practically ordered Marsh to fire its chief executive. That was done in ten days; a longtime Spitzer friend and campaign contributor was hired as a replacement, and as if for a thank-you Spitzer dropped his threats of criminal prosecution. (59) The matter of "restitution" was taken care of with an $850 million payment to businesses that had bought insurance through Marsh from the beginning of 2001 to the end of 2004, if the deal had involved contingent commissions. Lastly, it remained only for the victim to perform the central act in a Spitzer triumph—to crawl in self-abnegation, which Marsh did by terming "shameful" the behavior Spitzer had attacked. (60)


Virtually every article written about Eliot Spitzer accuses him of being politically ambitious. Typical was an article that appeared in Fortune; its author wrote: "Many a state attorney general has used the job as a springboard to higher political office. Rarely, however, has there been an example as egregious and blatant as that of Eliot Spitzer, current attorney general of New York State." (61) In response to these many accusations, Spitzer "replies that he's happy to have people impugn his motives when they can't challenge the merits of his actions." (62)

On this, I confess, I stand with Spitzer. A politician as intelligent and hard-working as Spitzer will naturally want to exercise his talents on the widest stage. If New York's attorney general were using his office to expand liberty in his state and beyond, I would not care if he hoped to win fame thereby and parlay that fame into a bid for higher office. The key issue, as Spitzer has said, is what he does, not his career goals.

The "what" has two parts: means and ends. As regards means: Even if Spitzer were pursuing cases of blatant and undeniable fraud, the Martin Act that he has employed is incompatible with the procedural rights that a person under investigation should possess. During his second year of law school, Spitzer signed on with Alan Dershowitz to serve as a research assistant for the Claus von Bülow appeal. If Spitzer could with good conscience pursue the appeal of von Bülow's conviction for murder, on the grounds that a violation of due process had allowed damning evidence to be entered against him, how can he now with good conscience persecute businessmen with so blatant a lack of due process? The answer, it would seem, is that the people in question are not accused of murder; they are accused of greed. Therefore, they have no rights.

To be sure, Spitzer did not write the Martin Act. But if he wished history to record that he pursued "the good" on his watch, he should have brought the Martin Act's potential for abuse to public notice and lobbied for its repeal. He did not. Rather, he used it to pursue what U.S. Chamber of Commerce president Tom Donohue has rightly called "the most egregious and unacceptable form of intimidation that we have seen in this country in modern time." (63)

As regards ends: Spitzer talks much about fraud, and genuine fraud is a violation of property rights. But if violations of property rights were his true concern, he would have staked his claim to "doing good" on the protection of property rights—the protection of property rights from assault by corporate fraud and the protection of property rights from assault by government force. He did not. On the contrary, his own actions have perpetrated such violations—and far worse violations of property rights than anything his corporate foes have ever carried out. It is clear, therefore, that Spitzer's conception of "doing good" is something quite different from securing the property rights of New York's citizens.

Doing good, for Eliot Spitzer, means compelling people, under the threat of prison, to accept, endorse, and follow his own moral precepts. From the three inquisitions described above, we can abstract several of those precepts. The first moral precept apparently driving Spitzer is an opposition to the intensely self-seeking nature of business. Spitzer seems to think that businessmen should follow an idealized model of professional behavior, such as many people seem to expect from doctors. This outlook is based on a pre-capitalist model according to which a person is expected to fill a traditional economic role, without direct concern for his remuneration. He is expected to count on having his just needs satisfied, not by a personal and fierce quest for money, but by the workings of a well-ordered economic mechanism that coordinates all of society's roles and gives to each person his due reward, according to his status. This model could by itself prohibit most ordinary commercial behavior. Participation in today's jostling marketplace does not mean carrying out a defined function. It means juggling a variety of customers and clients, products and prices, and mostly trying to make an honest buck from some concatenation of inputs and outputs, maneuvers and marketing, shortcuts and cross-subsidies, hustle and hype, back-scratching and back-slapping. "The doctor will see you now" just isn't in it.

The second moral premise to emerge from Spitzer's inquisitions is an egalitarianism that focuses on "the little guy" and his supposed right to "equal opportunity." Apparently, this precept relies partly on Spitzer's religious morality and partly on the antiquated model of "perfect competition," under which all participants have equal knowledge about what is being offered and equal access to it. In the view of such egalitarians, the traditional and natural practice of favoring good customers must be stamped out—as in the mutual funds and insurance inquisitions. Whatever intellectual foundations such a "business morality" may claim to be based upon, they have nothing to do with ordinary bourgeois behavior or simple commercial wisdom.

But Spitzer's master premise is Jacobinism, the notion that the liberty of human beings must be curbed by government virtue-crats acting in the name of morality. Despite all we have learned from public-choice theory, Spitzer truly believes that power-seekers like himself will create more ethical arrangements than will people who are acting in their own self-interest and who are curbed only by laws against force and fraud. As he asserted last year, since market capitalism is not "perfection itself," government must "put the brakes" on free markets, in order to "maintain a just and equitable society." (64) The historical record of those Robespierres who begin by complaining that the free actions of human beings are not perfect, and who go on to "perfect" them through the coercive instruments of government, is not an encouraging one.

Which is why all Americans should now scrutinize the political advancement of Eliot Spitzer: the higher his office, the wider will be his powers for carrying out his personal vision of shari'a. Even those who share the Spitzer morality should think twice about the evils that arise when politicians like Spitzer are allowed to turn their own set of moral commandments into legal commands that all must obey.

This article first appeared in the April/May 2005 print edition of The Atlas Society's Navigator magazine


1) Mark A. Hofman, "Are Spitzer's Eyes on the Top Prize?" Business Insurance, February 14, 2005.

2) Greg Sargent and Josh Benson, "El-iot! Can Spitzer Go to 1600?" New York Observer, October 21, 2002.

3) Adi Ignatius, "Crusader of the Year: Wall Street's Top Cop," Time, December 30, 2002.

4) Kenneth Lovett and Deborah Orin, "Tax Day $tings Leaders," New York Post, April 16, 2005.

5) Steve Yahn, "Running Man," http://www.riskandinsurance.com/ , January 1, 2005.

6) Ignatius, "Crusader of the Year."

7) Ignatius, "Crusader of the Year."

8) Holly Brubach, "Spitzer's Justice." Vanity Fair, January 2005.

9) Brooke A. Masters, "Eliot Spitzer Spoils for a Fight," Washington Post, May 31, 2004.

10) Ignatius, "Crusader of the Year."

11) http://www.constantinecannon.com/

12) Ignatius, "Crusader of the Year."

13) Editorial, "Eliot Spitzer for Attorney General," New York Times, October 29, 1998.

14) Alan Finder, "The 1998 Campaign: The Money," New York Times, October 28, 1998.

15) Editorial, "Eliot Spitzer for Attorney General."

16) Matthew Continetti, "I, Eliot," The Weekly Standard, March 7, 2005.

17) Steve Fishman, "Inside Eliot's Army," New York Magazine, January 10, 2005.

18) Yahn, "Running Man."

19) Fishman, "Inside Eliot's Army."

20) Thor Valdmanis, "'Fearless' Spitzer sure to rattle Wall Street," http://www.usatoday.com/ April 15, 2002.

21) Ignatius, "Crusader of the Year."

22) Fishman, "Inside Eliot's Army," italics in the original.


24) Fishman, "Inside Eliot's Army."

25) http://www.legalaffairs.org/issues/May-June-2004/feature_thompson_mayjun04.msp

26) Fishman, "Inside Eliot's Army."

27) Peter Elkind, "Spitzer's Crusade," Fortune, November 15, 2004.

28) Ian McDonald, "Marsh Can Do $600 Million, But Apologize?" Wall Street Journal, January 14, 2005.

29) MMC News, http://www.mmc.com/ , January 31, 2005.

30) Gretchen Morgenson, "The Envelopes, Please," New York Times, January 2, 2005.

31) http://www.oag.state.ny.us/press/2002/apr/apr08b_02.html

32) Jessica Sommar, "Merrill Lynch Stox Shocker," New York Post, April 9, 2002.

33) http://news.findlaw.com/legalnews/documents/archive_m.html/nyagmerrill0402aff.pdf

34) Washington Legal Foundation, Robert A. McTamaney, "New York's Martin Act: Expanding Enforcement in an Era of Federal Securities Regulation," Legal Backgrounder, Vol. 18, No. 5, February 28, 2003.

35) Charles Gasparino, Blood on the Street: The Sensational Inside Story of How Wall Street analysts Duped a Generation of Investors (New York: Free Press, 2005), pp. 245, 255.

36) Patrick McGeehan, "$100 Million Fine for Merrill Lynch," New York Times, May 22, 2002.

37) Ignatius, "Crusader of the Year."

38) Ben White, "Research Settlement Completed," Washington Post, August 27, 2004.

39) Ron Insana, "The People v. Wall Street," Money Magazine, June 1, 2002.

40) Julie Schlosser, "Spitzer Speaks," Fortune, May 27, 2003.

41) Peter Elkind, "The Secrets of Eddie Stern," Fortune, April 19, 2004.

42) Under the SEC's Rule 22c-1, mutual-fund shares must be sold, redeemed, or repurchased "at a price based on the current net asset value of such security which is next computed after the receipt of a tender of such security for redemption or of an order to purchase or sell such security." http://www.law.uc.edu/CCL/InvCoRls/rule22c-1.html

43) http://www.oag.state.ny.us/press/2003/sep/sep03a_03.html

44) http://news.findlaw.com/nytimes/docs/nys/nyscanary90303cmp.pdf

45) http://securities.stanford.edu/1028/BAC03-01/20030905_f01c_Lin.htm

46) Elsewhere, I have argued the need for a libertarian civil society to institute powerful structures for punishing immoral behavior. /articles/rdonway_importance-blacklisting.asp

47) http://www.professorbainbridge.com/2003/12/eliot_spitzer_i.html

48) Editorial, "Spitzer's Fee," Wall Street Journal, January 5, 2004.

49) ht tp://www.sec.gov/news/press/2003-176.htm

50) Fishman, "Inside Eliot's Army."

51) Theo Francis, "Spitzer Charges Bid Rigging in Insurance," Wall Street Journal, October 15, 2004.

52) http://www.oag.state.ny.us/press/2004/oct/oct14a_04.html

53) http://www.ssem.com/investigations/insurance_broker_fraud/eliot_spitzer_complaint.html

54) Joseph B. Treaster, "Under Fire, Marsh Stops Taking Fees From Insurers," New York Times, October 16, 2004.

55) Elkind, "Spitzer's Crusade."

5 56) Brooke A. Masters, "Insurers Feel Pressure, Drop Commissions," Washington Post, October 19, 2004.

57) http://www.ssem.com/investigations/insurance_broker_fraud/eliot_spitzer_complaint.html

58) http://www.townhall.com/columnists/alanreynolds/ar20041125.shtml

59) http://www.usatoday.com/money/industries/insurance/2004-10-31-cherasky_x.htm

60) http://www.oag.state.ny.us/press/2005/jan/marsh_agreement_exhibit.pdf

61) Rob Norton, "The Problem with Eliot Spitzer," Fortune, July 8, 2002.

62) Quoted in Ramesh Ponnuru, "Meet Eliot Spitzer," National Review, June 14, 2004.

63) Associated Press, January 5, 2005. See http://www.nygop.org/cgi-data/news/files/180.shtml

64) Eliot Spitzer and Andrew G. Celli Jr., "Bull Run," The New Republic, March 22, 2004.

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