Courtesy of the U.S. Chamber of Commerce

"The Old Prosecutor"
By David W. Marston John Whitehead was a voice in the wilderness. At a time when the national media was lionizing New York Attorney General Eliot Spitzer as the business-busting "sheriff of Wall Street," the Enforcer," a fortuitous combination of Moses and Teddy Roosevelt, Whitehead had the temerity to suggest that Spitzer was a thug. Except that Whitehead, the genteel former Chairman of Goldman, Sachs, did not express it quite like that. Instead, in a Wall Street Journal op-ed piece gently titled "Mr. Spitzer Has Gone Too Far" published on April 22, 2005, Whitehead opined that something was "seriously awry" when Attorney General Spitzer could publicly accuse businessman/philanthropist Maurice "Hank" Greenberg of criminal fraud without having filed a single charge in court, and without affording Greenberg any chance to defend himself. (Spitzer subsequently did file fraud charges against Greenberg, but was eventually forced to drop them; by then, however, Greenberg had been forced out as Chairman of AIG, a company he had built over four decades). Spitzer's response to the Whitehead op-ed was, well, thuggish. He called Whitehead and, based on Whitehead's notes, said: "Mr. Whitehead, it's now war between us and you've fired the first shot. I will be coming after you. You will pay the price. This is only the beginning and you will pay dearly for what you have done. You will wish you had never written that letter." The New York Attorney General sounded like a Godfather-wannabe, and this was no slip; it was Spitzer's standard modus operandi. Another example: at the 2004 Democratic Convention, Spitzer startled former GE chief Jack Welch by suddenly snapping, in an otherwise amiable conversation, that "you can tell your friend [Ken] Langone [another Spitzer target] that I'm gonna put a stake through his heart!" Long before Spitzer's exposure as Emporers Club VIP Client #9 abruptly ended his rocky reign as New York Governor, then, it was clear that he made up his own rules. From the start, based on the accounts of those he targeted, Spitzer's white-collar prosecution model--Spitzerism--was inherently flawed, depending heavily on threats, leaks, intimidation, and Spitzer's personal animus. He forced corporate defendants to choose between exercising basic constitutional rights or facing a bet-the-company criminal indictment. Many blue-chip companies were bullied into multi-million dollar settlements with Spitzer's office, often "without admitting wrongdoing," but an uncritical press chalked up all of the settlements as big Spitzer wins. When Spitzer targets actually fought him in court, his won-lost record was decidedly mixed. Spitzer's big cases were choreographed like a Soviet show trial, and in both spectacles, the ultimate outcome was never in doubt. Act 1 was always the Attorney General's discovery of yet another variety of shocking corporate corruption, his splashy announcement seething with appropriate indignation. Next came the editorials, commending Spitzer's zeal, bemoaning business ethics generally, and demanding harsh punishment of the guilty. Act 3 brought satisfying closure, with multi-million dollar settlements, purges of top executives into commercial exile, and, most important, contrite apologies and self-denunciations. In short, Spitzer's major prosecutions were a morality play, black and white with no gray areas, featuring an obvious Good Guy and numerous Bad Guys to be identified and punished. But morality plays have a problem. Once the Good Guy turns out not to be good, the immediate question is: were his designated Bad Guys really bad? To date, no one has seriously considered that issue. And unfortunately, for most who were actually involved, that question is largely moot; the fines have been paid, the personal and corporate reputations savaged, and the public has moved on. (After Spitzer's fall, it should be noted, the once-servile press turned on him ferociously. A New York Times piece tracing the money trail to his prostitutes named no fewer than nineteen reporters as having contributed to the story). Now Eliot Spitzer is gone from public life, but the flawed Spitzer prosecution model is not. Indeed, it is being copied by ambitious prosecutors across the country, who quickly learned, by TIME's recognition of Spitzer as Crusader of the Year in 2002, that criminalizing common commercial practices creates soft targets and adulatory headlines. As one senior investment banker said, "All of the states are trying to outdo Spitzer." In this context, it is appropriate to revisit Eliot Spitzer's record as New York Attorney General, especially since his tactics received very little critical scrutiny while he was in office. The purpose of this paper, then, is to analyze, from a former United States Attorney's perspective, Spitzer's prosecution tactics. This analysis will identify the weapons Spitzer used to force big settlements of cases which were by no means certain winners before a jury; consider the fundamental fairness of his tactics, and argue that his eventual disgrace necessitates a critical new look at Spitzerism. It Started With Enron. Eliot Spitzer did not invent aggressive white-collar crime prosecution, or the political environment in which it thrived. He did, however, intuitively sense his enormous leverage against corporate defendants, and from the outset, he understood three realities that made normal prosecutorial weapons more lethal in his hands. Enron changed the white-collar crime rules. Once America's seventh largest company, Enron collapsed in an astonishingly sudden meltdown in 2001. Unexpected bankruptcy filings by Adelphia, the fifth largest U.S. cable company, and WorldCom, the second largest telecom company, soon followed, and in each of the three cases, there seemed to be major missing assets as well as unbooked "surprise" liabilities. Suddenly, it seemed like corporate America was imploding. Retirement nest eggs vanished overnight, and the certifications of major accounting firms seemed meaningless. Corporate failures were reflexively blamed on executive criminality or accounting fraud, rather than on failed business models or plain poor management. Politicians demanded answers and culprits, and corporate executives and their accounting firms quickly realized that they were in prosecutors' cross hairs. Fast-forward four years. On September 12, 2006, Deputy Attorney General Paul J. McNulty reported to the Senate Judiciary Committee that "since 2002, the Department of Justice obtained more than 1,000 corporate fraud convictions and convicted more than 160 corporate presidents and executive officers." Those were truly astonishing statistics. How did DOJ manage that remarkable accomplishment in four short years? Beefed-up staffing and smart prioritizing and hard work by federal prosecutors all played a part, of course, but there was also a trick. DOJ changed the rules. The new rules greatly diminished the role of corporate defense attorneys, and penalized companies which paid their employees' attorney fees in a criminal investigation. In short, they took the defense lawyers out of the game. How the Rules Changed. The most significant changes at DOJ came in a memorandum issued on January 20, 2003 by Deputy Attorney General Larry D. Thompson. The Thompson Memorandum focused on the "authenticity of a corporation's cooperation" in a DOJ criminal probe. Non-cooperators would face criminal charges; cooperators generally would not. More specifically, the Memorandum was aimed at corporations which "purported" to cooperate, but then took actions to thwart the investigation. In determining whether a company "cooperated," the Memorandum specified nine factors that would determine whether to file criminal charges against the corporation itself, in addition to charging the individual employees who actually committed the crimes. Factor No. 4--innocuous at first blush--said that corporate cooperation would be indicated by "...the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection." Similarly, the Comment to Factor No. 4 made clear that a company's payment of attorney's fees for its culpable employees would be an indication of corporate non-cooperation. In practice, this quickly became a radical change. While federal prosecutors insist that they never demand waiver of the attorney-client privilege, after issuance of the Thompson Memorandum in 2003, every corporate target understood that there was really only a single stark choice: either waive the attorney-client and work product privileges, and stop paying employee attorney fees, or face criminal indictment. Not only were defense lawyers now largely out of the game, but privilege waiver also meant that any internal investigations done by the corporation had to be turned over to the government. As the Thompson Memorandum radically revised federal white-collar prosecution procedures, Eliot Spitzer was watching, and he fully understood the implications. Indeed, in early 2005, Attorney General Spitzer, speaking to the Association of Corporate Counsel's board of directors, cited federal practice to justify his own staff's aggressive pursuit of privilege waivers. So Eliot Spitzer did not invent this tactic, but it was a major weapon in his arsenal, and he used it to bludgeon public companies into expensive settlements. Courts have since ruled that a prosecutor's linkage of privilege waivers to criminal prosecution decisions, or pressuring an employer not to pay attorney fees for its employees, can constitute a violation of Fifth and Sixth Amendment protections. As Attorney General Michael Mukasey testified during his confirmation hearings in 2007, "absent privilege, the right to counsel is nearly meaningless." But during the height of Spitzerism, the coerced waiver of attorney-client and work product privileges was routine. Recognizing that over-zealous prosecutors had effectively eviscerated what the U.S. Supreme Court has recognized as the oldest privilege in American common law, U.S. Senator Arlen Specter (a former prosecutor himself) introduced the Attorney-Client Privilege Protection Act of 2008 ("ACCPA"). This bill would prohibit federal prosecutors from requesting the waiver of attorney-client and work product privileges, and would also remove the waiver issue as a consideration in charging decisions. ACCPA currently has twelve bipartisan Senate co-sponsors, and is supported by such unlikely bedfellows as the ACLU and the U.S. Chamber of Commerce. The U.S. Department of Justice, while initially not supporting the ACCPA, abruptly reversed its policy recently, and adopted voluntarily much of what the ACCPA would require. In a statement issued on August 28, 2008, Deputy Attorney General Mark Filip said the new DOJ guidelines, effective immediately, now prohibit federal prosecutors from asking companies under criminal investigation to waive their attorney-client privileges or to turn over legally protected materials. Further, DOJ will no longer give a "cooperation credit" for a privilege waiver, so the incentive for a "voluntary" waiver has been removed. Although other enforcement agencies, such as the SEC, may continue the previous policy, the new DOJ policy is nevertheless a significant retreat from the aggressive white-collar prosecution tactics of the post-Enron era. Eliot Spitzer, ironically, in the end turned out not to be wholly insensitive to the importance of the attorney-client privilege in American jurisprudence. In fact, when the New York Public Integrity Commission launched an investigation into Spitzer's alleged misuse of the New York State Police to spy on his political enemies, to protect his own documents Governor Spitzer invoked the attorney-client privilege--109 times. Three Things Spitzer Understood. They got Al Capone for taxes. Aggressive prosecutors have always been creative in crafting the legal tools needed to nail public menaces, and Spitzer was no exception. Lacking the broad powers of the SEC to pursue business fraud, he discovered the vast reach of the obscure Martin Act, a 1921 New York state law aimed at securities fraud. Anyone doing business in New York could be subpoenaed, and "fraudulent practices" actionable under the Act did not require reliance, actual damages, or even criminal intent. Targets of Martin Act investigations have no right to counsel or right against self-incrimination. Drafted to combat fly-by-night "bucket shop" scams, the Martin Act, pre-Spitzer, had rarely been used against reputable companies. But once deployed, it gave the AG "unique power to smear a company, industry or profession in the press." Indeed, in the hands of the Attorney General who would later call himself "a [vulgarity] steamroller," the Martin Act became "the legal equivalent of a weapon of mass destruction." Once they understood the potency of the "steamroller" wielding the Martin Act, Spitzer targets mostly cowered and folded. It did not matter that Spitzer's major corporate prosecutions seem to have been driven by a personal animus toward his targets, combined with his political ambition and limitless appetite for publicity. And Spitzer's use of the Martin Act was made even more lethal because of his understanding of three things other prosecutors had not yet recognized. First, in picking white-collar targets, the bankrupt and scandal-ridden Enrons and WorldComs were obvious candidates, but Spitzer realized that big healthy public companies were actually much more attractive. Thriving companies could pay big fines and make more sensational headlines, but even more important, they were immensely more vulnerable to the threat of indictment. Indeed, it is difficult to overstate the potency of threatened criminal charges (regardless of their eventual outcome) against public companies. In 2002, when Spitzer issued a press release charging Merrill Lynch with "corrupt" and "maybe criminal" practices regarding dot-com companies, the Merrill stock plunged by $10 billion. Merrill executives were publicly examined under oath by Spitzer's office ("to educate the investing public"), an exercise that required prior court approval but not, under the Martin Act, any prior notice to the execs. Suddenly, a $100 million fine looked pretty good, and a deal was cut. Similarly, when Spitzer announced criminal fraud charges against Marsh & McLennan in October 2004, the Marsh stock dropped by nearly 50%, and the company agreed to an $850 million settlement. The company also laid off 3,000 employees, most prominent among them, CEO Jeffrey Greenberg--as demanded by Spitzer. In short, criminal charges are often a death sentence for a public company. And even when a criminal conviction is ultimately reversed, as it was by the U.S. Supreme Court in the Arthur Anderson case in 2005 (not a Spitzer case), the corporate death sentence is generally not reversible. By the time Anderson "won" in the high court, only 200 of its once-28,000 employees remained. Second, with defense attorneys largely out of the game both because of forced privilege waivers and the provisions of the Martin Act, the prosecutor held all the cards. Spitzer could indict cases that might not hold up before a jury, because the economic realities forced speedy settlements, and he could also demand non-economic terms that seemed to legitimize his prosecution. Indeed, with settlement a foregone conclusion, the wording of the de rigueur corporate apology was often the main subject of negotiation. Marsh & McLennan's Chairman said somberly that their settlement with Spitzer's office "culminates a dark period in the company's history," and apologized for former employees' "unlawful" and "shameful" behavior. Ace Ltd. said that "certain employees violated both acceptable business practices and Ace's own standards of conduct." The frenzy to settle with Spitzer reached an almost comic level when insurance giant Aon Corp. set aside $50 million for settlement before Spitzer charged Aon with any wrongdoing. Then, when the Aon internal investigation found no evidence of bid rigging, Spitzer nevertheless insisted that any settlement would require "some public acknowledgement of the wrongdoing." Aon eventually settled with Spitzer for $190 million, without admitting wrongdoing, but Chairman Patrick G. Ryan said "...contingent commission agreements...created conflicts of interest, [and] I deeply regret that we took advantage of those conflicts." Unnoticed in the race to settle with Spitzer were two discordant facts: first, despite the general media applause for sheriff Spitzer standing up for the Little Guy, the megabucks in the settlements did not, with few exceptions, go to victimized small investors. Instead, they went to a very Big Guy, the general fund of the State of New York. Second, beyond allowing everyone to feel good about cleaning up shady Wall Street business practices, the mea culpas had a much more mercenary purpose: they jump-started the inevitable plaintiffs' class action lawsuits. Also, Spitzer's Martin Act subpoenas invariably turned up some smoking gun e-mails, again, setting the table nicely for the plaintiffs' lawyers once the company settled with Spitzer. Finally, Spitzer understood that the crimes charged did not have to be activities previously understood to be criminal. Indeed, with Wall Street awash in mea culpas, it was largely unrecognized that much of the "corruption" discovered by sheriff Spitzer was widely accepted commercial practice. Any company could be a Spitzer defendant. Aon Chairman Ryan said, "When Spitzer's investigation began in '04, I'd been in the business just about 40 years and contingent commissions had preceded me in the industry by about 70 years. They were very well established." Spitzer apologists will say that only proves his central contention, that entire economic sectors were intrinsically corrupt, rigged against the little guy. But where commercial conduct is broadly viewed as acceptable, any criminalization of it should be by prospective legislative action, not by massive retrospective criminal prosecutions. The cornerstone of criminal liability, after all, is mens rea, the guilty mind or criminal intent, which is, by definition, absent in any widely accepted commercial practice. This is no small point. Criminals must know when they are committing crimes; bank robbers, drug dealers and murderers always do. But a white-collar defendant, doing something he has done dozens of times before, which has been blessed by lawyers and accountants and is standard in the industry, may not have a clue. And if there is no criminal intent, the prosecutorial goal of deterrence disappears. Spitzer, however, used two basic tactics to obscure this fundamental legal defect in his crusade. First, he bulldozed targets into "voluntary" settlements that would never be tested in court, and the defendants' mandatory mea culpas seemed like adequate assurance of the fairness of the proceeding. Second, Spitzer routinely demonized his selected villains--without proof--as John Whitehead first noted in his op-ed piece criticizing Spitzer's treatment of AIG's Hank Greenberg. Co-conspirator Testimony: The Race to the AG's Office. Prosecutions have their own momentum. When cases are brought and settled in steadily accelerating numbers, as was the case in Spitzer's heyday, a sense of inevitability develops as soon as the prosecutor turns his attention to the next target. Everyone knows what the result is going to be, and whoever can cut the first deal with the Attorney General is likely to come out best. The prosecution of criminal conspiracies, then, often includes the testimony of co-conspirators, a reality that suggests several obvious problems. First, accomplice testimony is often considered to be "presumptively unreliable." The accomplice is likely a felon, has a clear incentive to exculpate himself while inculpating others, and may have an agreement with the government which will impact his testimony. Second, the accomplice's detailed knowledge of the conspiracy may itself be prejudicial, allowing the witness to minimize his own role while exaggerating the role of others. For this reason, the Federal Rules of Evidence provide that even relevant accomplice evidence may be excluded "...if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury..." Under prevailing case law, these complications are largely addressed by requiring that the testifying accomplice be subject to vigorous cross-examination. But with the vast majority of Spitzer's prosecutions being resolved in pre-trial settlements, there was never an opportunity for cross-examination. Thus, once charges were announced, it was a race to the AG's office, and the co-conspirator who managed to cut the first deal almost always came out most favorably. But whether that cooperating witness was indeed the least culpable was rarely tested by courtroom cross-examination. The Grasso Vendetta. In assessing the basic fairness of Spitzerism, one vital new fact emerged from his scandal-driven departure: in his personal life, Eliot Spitzer routinely lied. Spitzer defenders will cut to the familiar mantra that those lies were about sex and sex is private; but that mantra is wrong here. The fact is that a prosecutor's commitment to the truth starts with his oath of office, and is not limited to particular subject matters. Spitzer's now-known pattern of wholesale fabrications in his personal life raises obvious questions about his entire record as a prosecutor. Viewed in this context, the complaints from Spitzer targets that he would use any tactics, fair or not, to bring them down, has new credibility. And the relative handful of Spitzer defendants who actually fought him in court learned to expect that routine litigation papers could be backed up, at any time, by explosive tabloid bombshells. Just ask Richard Grasso. Grasso, the former Chairman of the New York Stock Exchange, negotiated a pay/retirement package with the NYSE worth nearly $190 million. It was duly approved by the NYSE Board of Directors, and formalized in a contract. But once made public, it was immediately clear that, legal or not, this extremely lucrative deal would be a lightning rod for public criticism. Spitzer, a onetime admirer of Grasso's performance, quickly saw the opening. He denounced Grasso's contract as a "gross abuse of power" and in 2004 he sued to block it, naming both Grasso and Ken Langone, co-founder of Home Depot and an NYSE board member, as defendants. Since there was no law limiting or capping private pay packages like Grasso's, Spitzer's theory was that as Attorney General, he had an inherent right to "act in the public interest" to protect the non-profit NYSE. In short, Spitzer could personally decide how much money Grasso could get from his private sector employer. Grasso and Langone fought back furiously, and when it was clear they were not going to fold, the litigation turned increasingly vituperative. A lurid--and anonymous--charge that Grasso was having an affair with this secretary was published; Grasso vigorously denied it, and the origin of the leak was later said to be Spitzer's office. In depositions, Spitzer's prosecutor asked Grasso point-blank whether he had fathered a "love child" in another relationship; a biographer writes that Grasso "flashed...that famous Grasso death stare..." at his questioner, and answered "No." After four years of court battles, during which time the NYSE converted itself into a for-profit corporation, New York's top court ruled in June 2008 that the attorney general had no jurisdiction to pursue the case. Spitzer's lawsuit was tossed out, and Grasso got to keep the money. Grasso said: "I've always had great confidence in the system of justice in this country and I'm gratified by the court's decision." Spitzer's case against co-defendant Ken Langone was also dismissed. Langone had a somewhat less charitable reaction: "We all have our own private hells. I just hope his [Spitzer's] is hotter than everyone else's." Conclusion: Judging Spitzerism After his Fall. Spitzerism was an in-your-face mix of hyper aggressive prosecutorial tactics, leaks and intimidation. The role of defense attorneys was often limited, judicial oversight was largely absent in the many cases that settled, and the media was more often cheerleader than critic. Moreover, in retrospect, it is now clear that Spitzer was capable of blatant fabrications in his personal life. At this point, it is impossible to say whether Spitzer fabrications, in addition to ending his tenure as Governor, also undermined the integrity of his prosecutions as Attorney General. But it is possible to conclude that basic fairness and respect for due process were not high priorities during the height of Spitzerism. His retroactive criminalization of common commercial practices was a new--and excessive--tactic in the prosecution of white-collar crime. (Antitrust defense lawyers might argue that it was nothing new at all, but that is another topic for another day). And his forced ouster of corporate executives who were not charged criminally seems, with hindsight, to be exactly what Spitzer accused Grasso of committing: a gross abuse of the power--but this time by the Attorney General's office. In the end, of course, it was Eliot Spitzer himself who had to resign in disgrace, facing possible criminal prosecution, and potential disbarment. Now, the question for the Greenbergs, Grasso, Langone and many of Spitzer's old targets is the same one asked by former U.S. Labor Secretary Ray Donovan, after his acquittal following a high-profile federal corruption trial: "Which office do I go to to get my reputation back?" David Marston is the former US Attorney for Philadelphia