Eliot Spitzer has rarely met a chief executive he couldn't scare into submission. For the past three years, Spitzer has been roiling U.S. businesses with his unique brand of populist corporate reform. In a period of intense backlash against the wave of corporate scandal and questionable Wall Street practices that typified the end of the boom, the crusading New York Attorney General has shown himself a master at trying cases in the court of public opinion. Spitzer's modus operandi is now familiar: Call in TV crews to announce a lawsuit with sweeping allegations of wrongdoing. It's been a hugely successful formula. After Spitzer has mounted wide-ranging probes against investment banks, mutual-fund companies, and now the insurance industry, top execs have repeatedly settled quickly to put out the raging PR firestorm. Only rarely has Spitzer been forced to actually take a case to trial.
Now however, Spitzer faces one of his fiercest opponents in Maurice R. "Hank" Greenberg. The former CEO of American International Group Inc. (AIG) has given every indication he will fight the civil fraud suit Spitzer filed against him on May 26. A settlement remains possible. But the AG will probably have to convince a jury that Greenberg committed civil fraud by using accounting trickery to gussy up AIG's financials.
Aside from his steely, tenacious nature, Greenberg may have a few other things going for him as he squares off against Spitzer. For starters, the corporate crime pendulum seems to be swinging back in the other direction. Spitzer has come under an increasing barrage of criticism from business groups and others who claim that his techniques rely too heavily on grabbing headlines and not enough on solid legal argument. His tactics are "the most egregious and unacceptable form of intimidation we have seen in this country" in modern times, Thomas J. Donohue, president of the U.S. Chamber of Commerce, said in January.
What's more, the critics argue, Spitzer, expected to make a run for New York governor next year, often wields his power too freely. "The problem with Eliot Spitzer and frankly a lot of the federal prosecutors is, in their zeal to appease public sentiment about various business practices, they've gone extreme," says Edward J.M. Little, a New York defense attorney who has tangled with Spitzer. "Almost any questionable business practice can be labeled a fraud."
Underscoring the growing mood that prosecutors may have been too zealous, on May 31, the U.S. Supreme Court reversed the 2002 criminal conviction of accounting firm Arthur Andersen for obstruction of justice, ruling that the trial judge's instructions to the jury in the document destruction case were tilted heavily in the prosecution's favor. At the core of the Supremes' ruling: In order for the jury to find Arthur Andersen guilty, the government should have had to prove criminal intent. Since the judge never specified that, the Supreme Court threw out the jury's decision.
So Spitzer has a high hurdle to clear. Fortunately for him, he appears to have strong cases against Greenberg and Howard I. Smith, AIG's former chief financial officer, both of whom insist that they have done nothing wrong. Here's why: Spitzer has a very big legal club in the Martin Act, a 1921 state statute that bars financial fraud without requiring the government to prove that the target willfully did something illegal. And Spitzer is applying the Martin Act to episodes in which there appears to be strong documentation that Greenberg participated in attempts to mislead AIG investors. "There's lots of low-hanging fruit" for Spitzer to pick, says University of Texas Law School Professor Henry T.C. Hu.
Making matters worse for Greenberg, AIG has turned against him. Named as a co-defendant in Spitzer's civil suit, the company is seeking a settlement. Moreover, on May 31, it released its long-awaited 2004 financial statement and restatement of previous periods, which reduced profits by nearly $4 billion over five years. Without admitting fraud, it changed its accounting treatment in every case cited in Spitzer's complaint. That concession makes it much harder for Greenberg to argue that the original accounting was defensible. "It's very difficult to defend a case when your co-defendant is confessing," says John C. Coffee, a professor at Columbia Law School. "He's in an impossible situation."
Of course, Greenberg isn't one to roll over and play dead. He has top legal representation, including David Boies, who led the government's antitrust prosecution of Microsoft Corp. (MSFT), and Martha Stewart's defense attorney, Robert G. Morvillo. The legal team is expected to argue that there was nothing illegal about trying to place AIG's results in the best light, that the relevant accounting rules are both complex and vague, and that all of the company's results were approved by both internal accountants and the company's independent auditor, PricewaterhouseCoopers.
But Spitzer's team is likely to argue that sign-offs by accountants or auditors don't absolve Greenberg or Smith of responsibility for the financial statements. They argue that the actions cited in the complaint were deliberate attempts to mislead investors about AIG's true financial condition -- and thus clear-cut violations of the Martin Act and other state fraud statutes. A centerpiece of their argument is the accusation that Greenberg personally initiated a scheme to inflate AIG's loss reserves through a phony $500 million reinsurance deal with General Re Corp., a unit of Warren E. Buffett's Berkshire Hathaway Inc. (BRKA). The government cites a phone call by Greenberg to Gen Re in which, it says, Greenberg insisted that the proposed deal be riskless for AIG. If true, that means Greenberg planned a deal from the start that would not qualify as reinsurance. Spitzer also cites documents that were apparently fabricated afterward to disguise the nature of the deal -- evidence that the participants felt they had something to hide. And to show that the gambit truly misled investors, Spitzer cites reports by stock market analysts who were impressed by the apparent increase in reserves.
Shareholders of insurance companies get nervous when the core underwriting business loses money. Spitzer says AIG disguised underwriting losses by making them appear to be losses on investments, which are less worrisome to shareholders. He also says Greenberg concealed AIG's ownership of offshore affiliates, onto which the company dumped losses. Both charges cite numerous internal memos addressed to Greenberg, plus testimony by AIG executive Joseph Umansky, who says the boss was closely involved.
Spitzer also presents evidence that Greenberg was highly motivated to cheat. The complaint alleges that Greenberg obsessively monitored AIG stock and ordered his traders to buy shares to prop it up -- in one case after the 3:50 p.m. deadline past which companies cannot buy their own shares. Spitzer calculates that every $1 change in the price of the stock erased or added $65 million to Greenberg's net worth.
Some of the most egregious alleged conduct had nothing to do with arcane accounting shenanigans. The complaint, for instance, cites memos and interview notes to show that Greenberg ignored his attorneys' warnings that the company was breaking the law by underreporting its premium income from workers' compensation policies. Doing so, Spitzer alleges, enabled the company to undercontribute to worker's compensation funds and underpay taxes on workers' comp premiums. A former general counsel, newly arrived in 1991, interviewed employees about whether AIG was complying with the law on workers' comp premiums. According to the counsel's notes, one employee said he told Greenberg that "if we were legal, we wouldn't be in business." Greenberg "began laughing and that was the end of it."
That's the kind of stuff prosecutors love to throw at a jury. Now, Spitzer's critics and defenders alike may finally find out whether it's actually enough to win one over.
By Peter Coy in New York