Eliot Spitzer: A Crusader Against Corporate Malfeasance or a Politically Ambitious Spotlight Hound? A Case Study of Eliot Spitzer and Marsh & McLennan

Georgetown Journal of Legal Ethics, The, Summer 2005 by Walha, Kulbir, Filusch, Edward E

I. INTRODUCTION

Over the past three years, New York Attorney General Eliot Spitzer has vaulted to international prominence using a series of high profile lawsuits against companies and individuals viewed as representative of Wall Street greed.1 These suits have made Spitzer a rising star in the Democratic Party and the prohibitive favorite for the Democratic Nomination for the Governorship of New York.2 These high profile suits have also made Spitzer an important figure in the international business community, to the degree that London's Financial Times named Spitzer its "Man of the Year" for 2004.3 Critics accuse Spitzer of using the bully pulpit and abusing the prosecutorial powers inherent in his position as attorney general to raise his political profile at the expense of high profile companies.4 These critics contend that he has gone beyond the powers of his post and infringed on the regulatory jurisdiction of the securities and Exchange Commission.5

In October 2004, Spitzer filed suit in New York against Marsh & McLennan ("Marsh"), the world's leading insurance broker with nearly seven billion dollars in annual revenues, alleging that Marsh violated their duties to their clients by accepting kickbacks from insurers and setting up a bid-rigging scheme designed to deceive its clients.6 The announcement of the suit caused Marsh's stock price to plummet 24% in one day alone.7 Marsh responded quickly by ousting the chairman and CEO, denouncing the allegations of bid-rigging as isolated incidents, and ending the practice of contingent commissions. On January 31, 2005, Marsh reached a settlement with Spitzer, in which Marsh agreed to pay $850 million in restitution to U.S. policyholders, undertake sweeping business practice reforms, and issue a letter of apology for the conduct of certain employees.8

This Note will first look briefly at Eliot Spitzer's history of prosecuting Wall Street crimes, his methods of prosecution, and the statutory basis for his lawsuits. Then the specifies of Spitzer's charges against Marsh, the effects of the charges, and the eventual settlement will be examined. Finally this Note will seek to analyze some of the existing rules which control the behavior of prosecutors.

II. SPITZER'S RISE TO PROMINENCE

This Section of the Note will look at how Mr. Spitzer burst onto the national scene and then will look at his legal methods, particularly New York's Martin Act, and theories behind these high-profile pursuits.

A. SPITZER'S INITIAL LAWSUITS

Eliot Spitzer first came to prominence in 1994 when he ran for New York Attorney General and finished a disappointing fourth in the Democratic Primary.9 Four years later, Spitzer successfully won the nomination and, in a closely contested race, defeated the Republican incumbent, Dennis Vacco, for Attorney General of New York State.10

Spitzer did not waste time before beginning the first of his many high profile cases. The first few high profile actions were not in the securities industry, the industry that would carry him to international prominence, but rather in the areas of environmental regulation and gun control.11

In the fall of 1999, Spitzer gained national publicity when he threatened to sue coal-emitting power plants in the Midwestern states for polluting New York's air under the Clean Air Act.12 In July 2002, Spitzer filed suit against Virginia Electric & Power and seven other utility companies alleging that their power plants were emitting pollutants into the upper atmosphere that were being carried over to New York.13 Spitzer, using a technique that he would later use against the securities industry, brought these suits under little known and then-little used pieces of legislation, in this case the Clean Air Act.14 The part of the Clean Air Act which enabled Spitzer to sue was known as new source review.15 The act exempted older power plants from meeting the strict air pollution standards applied to new plants unless major modifications are made, under the theory that the old plants would soon be replaced by newer, more environmentally friendly plants.16 Spitzer alleged that many of these plants had undergone "major life-extending" renovations, and therefore, they should have had costly pollutant reducing equipment installed as specified by the Clean Air Act.17 In order to fend off the suit, Virginia Electric and its parent company, Dominion Resources, agreed to invest $1.2 billion to decrease the amount of emissions from its coal burning power plants.18

Spitzer garnered more attention when he threatened to join several cities in the controversial suits against gun manufacturers under the state nuisance laws.19 Spitzer sued the gun manufacturers under state nuisance laws, arguing that the manufacturers had created a dangerous nuisance in the way in which they had manufactured, marketed, and distributed guns.20 Spitzer settled with Smith & Wesson, which agreed to add several safety features to its handguns and abide by a code of conduct.21 The other manufacturers initially refused to settle with Spitzer, and in fact shunned Smith & Wesson for breaking away from the unified stance of the other gun manufacturers.22 The gun manufacturers have since quietly added several of the safety features requested by Spitzer; however, they have continued to ferociously fight the lawsuit, winning at trial, and now fighting an appeal by Spitzer.23