Rapid reformer

An interview with Eliot Spitzer, New York state attorney general

By Dick Carozza

Eliot Spitzer targets fraud on Wall Street, in the mutual-fund business, and in the insurance industry. He says he wants the marketplace to work more efficiently, honestly, and fairly. Spitzer's methods offer lessons for fraud examiners.  

Some have called him a "champion of the people" who fights for the little guy ignored by big business. others say he's an ambitious polititician whose attacks on u.s. companies cause unneeded instability. Regardless, New York state attorney general Eliot Spitzer's investigations into alleged improprieties and fraud on Wall Street, in the mutual-fund business, and, most recently, in the insurance industry, have had impressive and speedy results.

In 2003, 10 Wall Street securities firms paid a $1.4 billion settlement after Spitzer's allegations that they and others had distributed misleading stock research to investors.

In an ongoing mutual fund investigation, Spitzer has negotiated scores of financial settlements with companies that he said have potentially cost mutual fund shareholders billions of dollars annually. When first announcing evidence of widespread illegal trading schemes in September of 2003, Spitzer said that the "mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system. They make illegal after-hours trades and improperly exploit market swings in ways that harm ordinary long-term investors." The investigation focuses on practices known as "late trading" and "market timing." (See sidebar on page 39.)

And then on October 14 of last year, Spitzer sued the nation's leading insurance commercial brokerage firm, Marsh & McLennan Companies, alleging that it steered unsuspecting clients to insurers with whom it had lucrative payoff agreements and that it solicited rigged bids for insurance contracts.

At the time, Spitzer said that "the insurance industry needs to take a long, hard look at itself. If the practices identified in our suit are as widespread as they appear to be, then the industry's fundamental business model needs major corrective action and reform."

The civil complaint alleged that Marsh received special payments from insurance companies that were above and beyond normal sales commissions. These payments - known as "contingent commissions" - were characterized as compensation for "market services." Insurance industry representatives, according to the N.Y. attorney general's office, defended this long-standing practice as acceptable and even beneficial to clients.

But the civil complaint said that 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. Marsh did this even as it claimed in public statements that its "guiding principle" was to always consider its client's best interests.

According to the complaint, Marsh collected approximately $800 million in contingent commissions in 2003. Spitzer's civil complaint seeks an end to steering and bid rigging, disgorgement of improper payments, restitution, and punitive damages.

About 10 days after Spitzer's suit against Marsh, its chairman and chief executive resigned. On November 18, five of Marsh's executive board members stepped down. At that point, the company took a 40 percent drop in the stock market and began laying off 3,000 employees.

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