New York’s crusading attorney general isn’t done with mutual funds — or with the rest of the financial-services industry
By now it sounds almost old hat. New York Attorney General Eliot Spitzer, in his latest move on Feb. 24, charged FleetBoston (FBF ) Financial’s mutual-fund unit with “engaging in a massive mutual-fund-trading scheme.” Although the civil suit was filed by the Securities & Exchange Commission, it was Spitzer who basked in the headlines.
“Spitzer once again leads the charge against corporate fraud,” says Anthony M. Sabino, law professor at St. John’s University. “He has attacked the fund industry with a vengeance, and he’s far from finished.” Advertisement
In fact, he has a long hit list. BusinessWeek has learned that next up may be former New York Stock Exchange Chairman Richard A. Grasso. A source in the AG’s office says Spitzer plans to file a civil complaint as early as March alleging that Grasso breached his fiduciary duty in collecting his infamous $187.5 million pay package. All Spitzer will say is that the case is still under investigation. Grasso’s attorney, Brendan V. Sullivan Jr., did not return calls seeking comment.
LOCK ‘EM UP. Spitzer’s office also says it’s likely to soon file the first criminal charges against an officer of a fund company since the scandal broke in September — Richard Strong of Strong Capital Management. Strong quit as CEO in December after allegations that he traded in his own funds. Says his attorney, Stanley Arkin: “There’s no criminal case here. Any criminal charges would be completely unwarranted.” And a settlement with Bank of America (BAC ), one of the first firms charged on Sept. 3, could come even sooner.
More criminal charges against mutual-fund figures are likely. In contrast to the Wall Street analysts’ case — in which he wrested $1.4 billion from 10 firms but sent no one to prison — Spitzer aims to put wrongdoers behind bars. He says it would have been unfair to jail analysts for following a business model that was widely accepted as proper. For the same reason, he says, it would have been impossible to make charges stick against higher-ups.
In the fund cases, neither restriction applies because laws prohibit after-hours trading, while fund prospectuses limit market timing. “We will bring criminal cases,” Spitzer told BusinessWeek. “Unfortunately, there will be a number of individuals who will go to jail.”
“UNUSUAL TALENT.” Spitzer also is delving into new areas of the financial-services industry. His spokesman says Carmel (Ind.)-based insurer Conseco (CNO ) may face civil charges by May in connection with improper market timing in its annuity products. If so, he could set off a wave of investigations of insurance firms.
“His resources are incredibly limited in contrast to the more than 1,000 enforcement officers at the SEC,” says David Gourevitch, a former SEC lawyer and assistant district attorney in Manhattan. “And yet they are churning out these cases, which is what all good, competent, ambitious, aggressive prosecutors do.” Conseco confirmed it received subpoenas, but says it sold its annuity unit in 2002.
At least 15 state attorneys general are looking into improper trading at mutual-fund firms, yet no one turns heads like Spitzer. “He has an unusual talent for impact cases that portend a fundamental change in the law or raise a policy issue,” says Joel Seligman, dean of Washington University’s School of Law. “And he has a greater gift for public relations.” So busy is his staff of 29 investor-protection attorneys that Spitzer is farming out cases to neighboring states. The latest: an investigation into alleged market timing at Newport Beach (Calif.) fund outfit Pacific Investment Management.