Excerpt
Chapter OneWhen Markets Need to Be Tamed
Eliot Spitzer had had enough.
It was October 2004. For six months, the hard-charging New York State attorney general and his staff had been following a tip that the huge corporate insurance broker Marsh Inc. was taking secret payments to steer clients to particular insurance companies. And for six months the companys corporate parent, Marsh & McLennan, had been effectively stonewalling, contending that there had been no underhandednessthat Marshs clients had known about the payments and that the money hadnt affected the recommendations of the firms brokers. Months of combing through e-mails and company documents had shown just the opposite, and worse. Some Marsh brokers had solicited false bids and told insurance companies what fees to charge so that they could steer business to favored firms. That was price-fixing, which was not only fraudulent behavior but a crime. Several insurance executives involved had already confessed and agreed to plead guilty.
But when Spitzer and his lawyers met with Marsh & McLennans general counsel, William Rosoff, on October 12, they didnt get the mea culpa they had expected. Instead, they got the brush-off. Rosoff insisted that his company didnt understand what all the fuss was about. It wasnt really clear what had happened. No clients had been hurt by the arrangements. This was just the way things worked. And finally he said dismissively, “You just dont understand the insurance business.”
It was time to go public. Spitzer wasnt about to let an insurance broker push him around, even if it was the worlds largest. As New York attorney general, Spitzer had spent much of the past six years mounting legal attacks on a variety of wrongs, which in his estimation included everything from Wall Street corruption to President George W. Bushs environmental policies. His balding pate, jutting chin, and pointing finger were ubiquitous on television news shows and in the pages of the countrys top newspapers. When he ventured outside his downtown Manhattan office, he couldnt walk two blocks without being stopped by well-wishers who praised him for standing up to Big Business. Tipsters jammed his office phone lines with tales of woe and financial malfeasance. Whats more, his investigations got results. Spitzer had faced down all kinds of giant firms, from the investment banks Citigroup and Merrill Lynch to the drug maker GlaxoSmithKline to the Food Emporium supermarket chain. He had exacted reforms and huge penalties: more than $1.5 billion from a dozen Wall Street investment banks for issuing biased research; more than $3.5 billion from mutual funds and brokers for improper short-term trading. And he was still only forty-five years old. All of this made him a rising star in the Democratic Party.
But in the Marsh case, Spitzer wanted to do more. He had decided to send a strong message to corporate America that his investigations were about more than money. From now on, top executives who presided over bad behavior couldnt simply claim they had had no idea what was happening, pay a fine, and expect to walk away unscathed. “Weve been trying, through these cases, to make the larger point that some core ethical behavior is necessary,” Spitzer reflected. “At some point you have to say, wait a minute, fellows. Thats it. Its only when you hold the CEO accountable that you show people that something must change. The question is how to do that.”
Dogged lawyers in Spitzers office had already spent sleepless nights crafting a detailed and dramatic legal complaint that laid out the bid-rigging and contract-steering allegations against Marsh. But there was no evidence that the companys chief executive, Jeffrey Greenberg, had known about or condoned the scheme, which had started before his arrival at the company. Nor was it entirely clear that Greenberg had authorized Rosoffs stiff-arm defense. But even though the attorney generals investigators had never talked to the CEO directly, Spitzer was convinced the problems flowed from the executive suite. The bid-rigging case wasnt his first run-in with Marsh & McLennan. Its Putnam Investments subsidiary had been embroiled in the mutual fund trading scandal that had started the previous year. And its Mercer Consulting arm had paid a settlement as part of Spitzers high-profile battle with New York Stock Exchange chairman Richard A. Grasso over Grassos $140 million pay package. Marsh & McLennan “had three main businesses and no apparent controls in any of them. At some point you suspect the laxness is coming from the top. . . . It was at best a completely passive management,” remembered David D. Brown IV, the assistant attorney general who spearheaded both the mutual fund and insurance probes for Spitzer. Bringing charges against Greenberg personally would be unfair, Spitzer knew. But there must be something else he could do.
On the morning of October 14, Spitzer gathered with his senior staff in his twenty-fifth-floor office in downtown Manhattan to prepare for that days press conference about the Marsh case. Television cameras and newspaper reporters were already assembling in a room down the hall, and stock traders were hovering by their televisions, ready to dump their shares of whatever company turned out to be Spitzers unlucky target. In Spitzers office, his top deputies clustered beside his desk and peppered their boss with questions, pretending to be reporters. As the mock session broke up, Spitzer made an announcement. “Im going to refuse to negotiate with this management,” he said. Spitzers lieutenants stared at him in silence.
Spitzer was proposing something unprecedented, at least in the recent annals of white-collar crime. In a free-market economy, boards of directors were supposed to have the freedom to choose company executives without government interference. By announcing that he would not negotiate with the firms current leadership, Spitzer was imposing a Hobsons choice on Marsh & McLennans board of directorsthey could fire Jeffrey Greenberg or face possible criminal charges against the company. Recent history had shown that it was virtually impossible for a public company to withstand a criminal indictment. Just two years earlier, the accounting giant Arthur Andersen had all but vanished after being charged in federal court with obstruction of justice. And Merrill Lynchs stock had lost about 20 percent of its value in three weeks when Spitzer publicly refused to rule out corporate criminal charges. In the past, some prosecutors had asked for leadership changes as part of a settlement, but they had done it quietly, indirectlythe government might say to company lawyers with a knowing look, “You might find this case easier to settle if you had a different chief executive.” No one could remember a case where a prosecutor went public with such a demand. “Are you sure you really want to do that?” asked First Deputy Attorney General Michele Hirshman, Spitzers number two.
Hirshman and the others knew that Spitzer was already being roasted in the corporate world as a headline-hunting bully with no respect for market forces or due process of law. The Wall Street Journal editorial page, often seen as the voice of the business communitys conservative wing, had made him its top enemy, editorializing against him weekly (and sometimes daily) as an ambitious meddler. The Forbes.com website was offering readers a printer-ready Hallowee