Eliot Spitzer and the 92nd Street Y
In the land of the blind, the one eyed man is king.
And so, Eliot Spitzer, Attorney General of New York, is king of the corporate crime prosecutors.
Surely, no other prosecutor in the nation has the energy that moves Spitzer to bring cases against some of the nationâ€™s largest companies.
And there is no question that Spitzer's work has uncovered corporate wrongdoing that would otherwise remain concealed -- and that his investigative zeal exerts a deterrent effect on the executive class.
But when he is about to do justice, and all the cameras are focused on him, Spitzer pulls his punches.
He wants to be Governor of New York.
And then President of the United States.
Letâ€™s take a well known corporate crime case that will hit home with many parents.
And letâ€™s see how the king of the corporate crime prosecutors handled it.
Letâ€™s say you are a new parent.
And you want to start your kids in a top pre-school so they are on track for an Ivy League education.
In New York, that means getting your kids into the 92nd Street Y in Manhattan.
Two year olds are given IQ tests.
They are interviewed.
The parents are interviewed.
Tuition runs $15,000 a year.
In addition, parents are expected to make generous donations.
In the fall of 1999, this was the situation facing Jack Grubman and his wife LuAnn.
Despite a number of meetings with the school, and promises of support, his twin two-year olds didnâ€™t make the short list.
At the time, Grubman was an analyst with Citigroup unit Salomon Smith Barney.
Grubman was the nationâ€™s top telecom analyst.
And he didnâ€™t like AT&T.
This presented a problem for Sandy Weill, then chairman of Citigroup, and thus Grubmanâ€™s boss.
Weill was in a power struggle with fellow co-CEO Jack Reed.
Weill needed all the votes he could get on the board to get rid of Reed.
And one of those votes was C. Michael Armstrong, the head of AT&T.
Armstrong was not happy with Grubmanâ€™s negative rating of AT&T.
And he let Weill know it.
So, Weill began a campaign to get Grubman to take a â€œfresh lookâ€ at AT&T stock.
And so Grubman began to take a â€œfresh look.â€
And as he was taking a â€œfresh look,â€ he wrote a two page memo to Sandy Weill, his boss, titled â€œAT&T and the 92nd Street Y.â€
He reviewed for Weill how the â€œfresh lookâ€ was going -- meetings with top AT&T executives, including with Armstrong, promises to keep Weill posted
There is this matter of the â€œridiculous but necessary process of preschool applications in Manhattan.â€
â€œGiven that itâ€™s statistically easier to get into the Harvard freshman class than it is to get into preschool at the 92nd Street Y, it comes down to â€˜who you know,â€™â€ Grubman wrote.
â€œAnyway, anything you could do Sandy would be greatly appreciated. As I mentioned, I will keep you posted on the progress with AT&T which I think is going well. â€¦ If you feel comfortable and know some of these board members well enough, I would greatly appreciate it if you could ask them to use any influence they feel comfortable in using to help us as well.â€
Weill then arranged to donate $1 million to the school if Grubman's kids were let in.
And he did.
And they were.
And Grubman upgraded his rating of AT&T stock in November 1999.
Charles Gasparino relates this story in his new book, Blood on the Street: The Sensational Inside Story of How Wall Street Analysts Duped A Generation of Investors (Free Press, 2005).
Gasparino wrote about the analysts for hire while he was the Wall Street Journal.
Heâ€™s currently with Newsweek.
In an interview, Gasparino was critical of Spitzer for settling his cases against the big Wall Street firms for pennies on the dollar, for not getting them to admit wrongdoing, and for not bringing criminal prosecutions.
The 92nd Street Y story led Gasparino to ask -- why wasnâ€™t Weill charged with wrongdoing in this case?
Because Attorney General Eliot Spitzer pulled his punches.
On December 2002, Spitzer stood before a slew of cameras at the New York Stock Exchange and announced a global settlement with 10 big firms that closed out Spitzerâ€™s investigation into the undue influence of investment banking interests on securities research at brokerage firms.
In a separate civil case, Grubman was permanently barred from working in the securities industry.
But were any charges ever brought against the big kahuna, Sanford Weill?
And why not?
â€œEliot let him go,â€ Gasparino told us. â€œAnd thatâ€™s a big problem. Iâ€™m not saying that the guy should have been put in jail forever, but he should have been charged. But Eliot knew that if he charged Weill, he might have lost the chance to proclaim victory -- to claim that Wall Street research is somehow now saved, that there are structural reforms now, when there really wasnâ€™t.â€
If he charged Weill or any other individual executive in the case, then the companies would not agree to a big â€œglobal settlement,â€ and Spitzer would not have been given the chance to stand before all of those adoring cameras at the NYSE.
And Weill was a big player in the Democratic Party.
And after all, Spitzer wants to be Governor of New York.
And then maybe President of the United States.
Donâ€™t bite the hand that might feed your political aspirations.
And of course it is not just the Weill case.
In May 2004, Spitzer sued Richard Grasso the former head of the New York Stock Exchange, for excessive compensation.
The lawsuit was filed after a four-month investigation by Spitzer's office determined that directors of the NYSE were misled about various aspects of the $187.5 million payment package awarded to Grasso.
Well, if Grasso was charged, why not Carl McCall, the head of the NYSE Compensation Committee, which approved Grassoâ€™s pay package?
â€œPolitics,â€ Gasparino told us. â€œCarl McCall is a prominent Democrat. Heâ€™s an African-American. If you are running as a Democrat, you need the African American vote. For him to go after Carl McCall, he would get a lot of heat from prominent African Americans in the state.â€
Earlier this month, Spitzer forced one of the nationâ€™s largest insurance brokerage firms, Marsh and McLennan Companies Inc., to pay $850 million and to agree to a ban contingent fees to resolve allegations that Marsh steered its clients to insurers with which it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts.
Spitzer has come under fire for settling case after case against big companies without demanding an admission of wrongdoing.
And this case was no different. The company â€œneither admitted nor denied wrongdoing.â€
When asked why they were allowed to â€œneither admit nor deny,â€ Michele Hirshman, the first deputy attorney general, told the New York Times: "We are interested in seeing this company and its employees be able to survive under this new business model -- we wanted to avoid corporate capital punishment here."
Spitzer: in favor of the death penalty for individuals, but not for corporations.
Spitzer is like every other politician -- cutting deals to get ahead. Or as Gasparino told us: â€œEvery politician is driven by publicity. I was trying to show that there are way too many stories portraying him as this unconflicted white knight trying to do what others wonâ€™t do. This man is a politician. He is ambitious. He does cut deals. And some of the deals are not very good for small investors.â€
Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter,