Risk & Compliance

Wall Street Warrior

Ten questions for New York Attorney General Eliot Spitzer. His one message for CFOs: ''Be careful.''
A CFO InterviewNovember 1, 2003

Eliot Spitzer seems bent on bringing another Wall Street giant to its knees. This time the 44-year-old New York Attorney General is targeting the mutual-fund industry, with a probe of late-day trading activities and market timing at Canary Capital Partners that has led to the first-ever criminal charges in the financial-markets investigation.

All indications are that they won’t be the last. Spitzer hints that this investigation “certainly could go beyond” the four fund houses named so far. And the candidate for public office in 2006—possibly for governor of New York—maintains that he still has “loads to do, and not just in the context of the financial markets, but in terms of the environment, labor markets, the Internet, privacy, and health care.” His message to CFOs: “Be careful.”

This is the first time you have levied criminal charges. What gives you the authority to bring them?

Statutorially, we have both criminal and civil jurisdiction. The brazenness of the scheme as laid out in the Canary [Capital] complaint and mirrored in the felony complaint against Mr. [Theodore] Sihpol [the former Bank of America broker charged] are what led us to believe that criminal action was appropriate.

You have had several Wall Street investigations at this point. Why haven’t you brought criminal charges before?

Every case has a slightly different contour and context. In the context of late-day trading, there’s clarity to a legal structure that makes it easier to file criminal charges.

Does that ease come from having New York’s Martin Act at your disposal?

It’s partly the Martin Act. It’s also partly that the law requiring that orders placed after 4 p.m. be priced at the next day’s NAV [net asset value] is very clear. When you look at what [Sihpol] allegedly did, which was to prestamp tickets and pretend that the orders had been placed prior to 4 p.m., [that is] eminently provable.

You’ve said this is just “day one” of the investigation. How widespread will it be?

One just doesn’t know until the investigation is complete. Having said that, there are a significant number of entities that are of interest to us.

During the investigations of the investment banks, you were looking for structural change. Is that your goal here?

I’m not sure. And the reason I’m hesitating is that the rules here are reasonably clear and precise. With late-day trading, I’m not sure we need structural reform or new rules or laws. We need aggressive enforcement.

The Securities and Exchange Commission is trying to formalize cooperation between state and federal regulators in such areas as enforcement. What will you gain from federal involvement?

The resources, the capacity to pursue investigations, insight into law, experience with prior investigations—it’s a win-win. We have information that we’ve accumulated; they have information and resources and wisdom. We’ll put our heads together and [give] the public what it deserves—better law enforcement.

Is this a truce in the turf war between the state and the federal regulators?

Are there occasionally frictions among or between law-enforcement entities? Sure. But sometimes the [media] articles about those tensions overstate the reality.

What improvements have you seen since the $1.4 billion Wall Street settlement?

We are still waiting for the federal court to sign off…. Once that happens, they will put in place the independent research and the other aspects of the deal…. [But] the sense I have is that research is indeed changing and improving on the Street.

Your investigations have dealt with conflicts of interest. Does that call into question deregulation of financial services?

The conflicts may be a consequence of deregulatory decisions. Not all are. The research issues frankly did not flow directly from repeal of the Glass-Stegall Act, because research and investment banking existed under one roof before it was repealed. But perhaps it is indicative of an environment where there was a little less scrutiny. So the objective here may not be to reregulate, but to ensure that people live up to their fiduciary obligations.

How can CFOs avoid a call from you?

Be careful…. CFOs should examine how their businesses are structured; how people are generating revenues. They should ask hard questions of those who report to them about potential deviations from the duties that are owed to shareholders.

Interview by Lori Calabro