Eliot Spitzer

By Hastings, Michael | Newsweek International, May 12, 2003 | Go to article overview

Eliot Spitzer


Hastings, Michael, Newsweek International


Behind every great corporate scandal is a great reformer. New York Attorney General Eliot Spitzer has sought that mantle ever since the popping of the 1990s tech bubble rocked Wall Street, exposing deep conflicts of interest inside its investment banks. Last week U.S authorities, led by Spitzer, announced an unprecedented $1.4 billion settlement with 10 of Wall Street's top firms. Citigroup's Salomon Smith Barney unit, Merrill Lynch and Credit Suisse First Boston were accused of fraud for pressuring analysts to give favorable reports on troubled companies, in order to lure their investment-banking business. Five other firms were charged with issuing "exaggerated" research reports. The settlement puts aside $387.5 million to compensate investors who can prove they were duped by tainted research.

None of the firms charged have admitted or denied wrongdoing, but they have agreed to institute reforms designed to insure that analysts are giving honest opinions, including the creation of a real fire wall between the analysts and investment bankers. NEWSWEEK's Michael Hastings spoke to Spitzer about his victory and where Wall Street stands today:

NEWSWEEK: Does Wall Street get it?

SPITZER: I am persuaded that most of the leadership on Wall Street understands that the structural changes that are captured in the global settlement are necessary and good for Wall Street. There are inevitably going to be some who are more resistant than others, but by and large the leadership is embracing the need for change.

Has the bad-apple argument--just a few guys spoiling the whole bunch-- been disproved?

I think it's been disproved by the pervasive nature of the structural flaws that led to this behavior. The critical point that we were trying to make last year--and [that] has been established by the voluminous evidence that is now in the public record--is that the entire structure of research had been undermined by making it subservient to investment banking. It was more than a few bad actors.

What are the key structural reforms?

The most important is the complete and total severance of analyst compensation from investment banking. That, and an obligation on the part of the investment houses to compensate analysts based upon the value and accuracy of their recommendations.

Have you faced resistance from the business community? …

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