Spitzer Gets Spitzered

The stock market may be battered, the dollar may be plunging, and the economy may be tanking, but there's a bull market in schadenfreude on Wall Street this afternoon. Even as the Dow was on its way to notching another triple-digit loss, whoops of joy erupted from the dispirited trading floors today on news of New York Gov. Eliot Spitzer's disgrace. Spitzer, who rose to prominence as a scourge of Wall Street, uprooting corrupt practices, coming down hard on bad actors and establishing a new moral order, was laid low by reports that he had been involved in a prostitution ring.

Details are still emerging, and it's unclear how this will all shake out, but one thing is immediately clear: Spitzer has been hoisted on his own petard, brought down by the same kind of investigation he pioneered as a prosecutor. The analogies between Wall Street and prostitution aren't perfect. (On Wall Street, for example, the transactions involving favors for money are generally conducted when both parties are fully clothed.) But he may have fallen prey to the same types of circumstances and dynamics that led to his astonishing rise.

The unnecessary digital trail. Among Spitzer's biggest triumphs as New York attorney general was the investment banking research cases, in which he bludgeoned Wall Street's biggest banks into an expensive settlement of charges that they pimped out research recommendations in exchange for banking fees. The smoking gun: incriminating e-mails from analysts. Of all people, Spitzer should know that whether you're prostituting out investment analysis for the sake of banking fees or you're a governor using the services of expensive prostitutes, discretion is a paramount value. The first and last rule is not to create a paper trail—or, in this age, a digital trail—that can come back to haunt you. But he was reportedly caught on wiretaps discussing bringing a prostitute to Washington to meet him at a hotel.

Everybody does it, right? Many of the Wall Street figures Spitzer nailed were engaging in activities that looked skeevy when exposed to the public but were generally well known and accepted by the powers that be. Until Spitzer, investment banks giving buy ratings to their investment banking clients and spinning shares of hot IPOs to the personal accounts of executives who funneled investment banking fees their way were common practices at Wall Street's top firms. The executives nailed by Spitzer thought they were engaging in routine activity and never thought they could be indicted for it. The same holds, to a different degree, with high-end prostitution. In New York high-end prostitution is widely acknowledged and generally tolerated, though heavily cloaked in euphemism. As recently as December, a respectable publication like New York magazine ran ads or high-end escort services. (It has since stopped accepting such ads.) Fancy gentlemen's clubs and strip joints (where all sorts of services are available upon negotiation or request) operate with full sanction of the law. Comparatively few of those involved in it are arrested, and the johns are almost never prosecuted. Spitzer likely thought that he too was engaging in a practice common among men of his social and economic class, and that the likelihood of prosecution was exceedingly low.

The law is an ass. Wall Street executives who ran afoul of Eliot Spitzer earlier this decade found they were in deep trouble because of a peculiar wrinkle in the law. They found their options limited because they happened to conduct their business in New York. Spitzer had at his disposal the Martin Act, a 1921 piece of legislation that, as Nicholas Thompson noted in this Legal Affairs piece, gives extraordinary powers and discretion to an attorney general fighting financial fraud. Thompson noted that "people called in for questioning during Martin Act investigations do not have a right to counsel or a right against self-incrimination. Combined, the act's powers exceed those given any regulator in any other state." In Spitzer's case, he may have landed in water that was hotter than it might have otherwise been because he decided to do some of his business in Washington, D.C. (on the night before Valentine's Day, no less). By allegedly arranging for a prostitute to travel across state lines from New York to Washington, D.C., Spitzer may have bumped up his indiscretions from a violation of state to a violation of federal law—a much more serious matter.

After-hours trading. One of Spitzer's signature crusades as attorney general was unearthing the scandals of late trading—in which mutual funds would allow favored clients (usually hedge funds) to enter and exit rapidly on terms not available to retail investors. When that happened, Spitzer demanded that the executives responsible, among them Richard Strong, founder and chairman of Strong Capital Management, resign and face lifetime bans from the industry. Now that he's apparently been caught trading illicitly after hours, the top executive of the state of New York may be forced to resign and accept a lifetime ban from his industry.

© 2008