) Financial's mutual-fund unit with "engaging in a massive mutual-fund-trading scheme." Although the civil suit was filed by the Securities & Exchange Commission, it was Spitzer who basked in the headlines. "Spitzer once again leads the charge against corporate fraud," says Anthony M. Sabino, law professor at St. John's University. "He has attacked the fund industry with a vengeance, and he's far from finished."
In fact, he has a long hit list. BusinessWeek has learned that next up may be former New York Stock Exchange Chairman Richard A. Grasso. A source in the AG's office says Spitzer plans to file a civil complaint as early as March alleging that Grasso breached his fiduciary duty in collecting his infamous $187.5 million pay package. All Spitzer will say is that the case is still under investigation. Grasso's attorney, Brendan V. Sullivan Jr., did not return calls seeking comment.
LOCK 'EM UP. Spitzer's office also says it's likely to soon file the first criminal charges against an officer of a fund company since the scandal broke in September -- Richard Strong of Strong Capital Management. Strong quit as CEO in December after allegations that he traded in his own funds. Says his attorney, Stanley Arkin: "There's no criminal case here. Any criminal charges would be completely unwarranted." And a settlement with Bank of America (BAC
), one of the first firms charged on Sept. 3, could come even sooner.
More criminal charges against mutual-fund figures are likely. In contrast to the Wall Street analysts' case -- in which he wrested $1.4 billion from 10 firms but sent no one to prison -- Spitzer aims to put wrongdoers behind bars. He says it would have been unfair to jail analysts for following a business model that was widely accepted as proper. For the same reason, he says, it would have been impossible to make charges stick against higher-ups.
In the fund cases, neither restriction applies because laws prohibit after-hours trading, while fund prospectuses limit market timing. "We will bring criminal cases," Spitzer told BusinessWeek. "Unfortunately, there will be a number of individuals who will go to jail."
"UNUSUAL TALENT." Spitzer also is delving into new areas of the financial-services industry. His spokesman says Carmel (Ind.)-based insurer Conseco (CNO
) may face civil charges by May in connection with improper market timing in its annuity products. If so, he could set off a wave of investigations of insurance firms.
"His resources are incredibly limited in contrast to the more than 1,000 enforcement officers at the SEC," says David Gourevitch, a former SEC lawyer and assistant district attorney in Manhattan. "And yet they are churning out these cases, which is what all good, competent, ambitious, aggressive prosecutors do." Conseco confirmed it received subpoenas, but says it sold its annuity unit in 2002.
At least 15 state attorneys general are looking into improper trading at mutual-fund firms, yet no one turns heads like Spitzer. "He has an unusual talent for impact cases that portend a fundamental change in the law or raise a policy issue," says Joel Seligman, dean of Washington University's School of Law. "And he has a greater gift for public relations." So busy is his staff of 29 investor-protection attorneys that Spitzer is farming out cases to neighboring states. The latest: an investigation into alleged market timing at Newport Beach (Calif.) fund outfit Pacific Investment Management.
TOO AWKWARD FOR THE NYSE? Meanwhile, Spitzer shows no sign of containing his habit of crossing swords with the feds. He broke ranks with the SEC in December by striking a deal requiring Alliance Capital Management (AC
) to cut its management fees by 20% and freeze them for at least five years. Within hours, SEC commissioners branded Spitzer's move as government price-setting. But by Jan. 15, Spitzer was at it again, enlisting the state treasurers of New York, California, and North Carolina to pressure fund managers to cut management fees, among other reforms that go further than recent SEC proposals that simply require more disclosure.
Spitzer jumps in where others hesitate to tread. One legal expert says a civil action brought by the NYSE against Grasso and his board would have been "far easier to prove, far more predictable, and much more appropriate." Yet the new NYSE leadership opted to turn the investigation over to Spitzer and the SEC on Jan. 8. In a letter to them, interim NYSE Chairman John Reed wrote: "We believe that you are more capable of pursuing the matter."
Dan Kurtz, a partner with Holland & Knight, says the case may have been too awkward for the board. "They were seen as enablers and actively involved in the compensation process, willfully or not." Spitzer will likely make full use of his authority under New York's Not-for-Profit Corporation Law, under which the exchange is incorporated. That law allows him to go after directors who received assets they weren't entitled to or who wasted corporate assets, says Kurtz.
ON THE STUMP? Spitzer has already shown he's ready to use the full arsenal of prosecutorial weapons. On Feb. 2, he charged Paul A. Flynn, the former managing director of Canadian Imperial Bank of Commerce (BCM
), with financing two hedge funds that allegedly took part in late trading and market timing. Spitzer did not limit himself to New York's securities-fraud statute, but charged Flynn with grand larceny -- which carries a prison term of up to 25 years. Flynn's attorney, David Gendleman, had no comment.
Lately, Spitzer sounds distinctly like a man on the campaign trail. (He's raising money for what some say will be a bid for New York governor in 2006.) In a Feb. 24 speech at Georgetown University Law Center, he accused the Bush Administration of being hostile to environmental, housing, civil rights, and other laws -- and said it's up to him and other AGs to step in. In particular, he attacked the feds for tying states' hands by preempting state rules against predatory lending practices by banks, which harm minorities. "Access to capital is one of the most important civil rights issues we face today," he said. "Predatory lending...needs to be confronted."
Spitzer says AGs can't do everything. "We cannot have 50 state regulators trying to regulate the securities markets," he said at Georgetown. "There must be a primary regulator, but we can provide a competitive counterpoint" by bringing cases to light and pushing Washington to tighten the laws.
It's not that other regulators haven't made headway. They just don't make the headlines. Since the start of the year, in fact, the SEC has issued a slew of proposals -- on governance, on justifying the choice of investment advisers, on sales practices, on market timing and late-day trading -- that will permanently change the business of mutual funds, says Gourevitch. "Because of that, the SEC has regained a lot of the leadership that they initially lost," he says. Even so, Spitzer isn't likely to let anyone forget who keeps the ball rolling. By Mara Der Hovanesian in New York, with Paula Dwyer in Washington