Ten financial firms recently agreed to pay $1.4 billion in ransom if Elliot Spitzer and his band of copycats would agree to stop pounding them in the press with assorted rumors, smears, and threats. Although this was promptly described by an affluent securities lawyer as a “slap on the wrist,” Larry Kudlow noted that the sum is equivalent to an extra 20% tax on annual profits from the entire financial-services industry. That was just a down payment, since nebulous and unproven accusations are irresistible bait for trial lawyers. One group of ambulance chasers is already using TV ads on CNBC to recruit those who feel victimized by the bear market.
Spitzer’s rough game was always about money and politics. A recent Washington Post report said, “Officials in Spitzer’s office have publicly warned Citigroup Inc. that civil or criminal charges remain a possibility if the firm does not agree to pay a large fine.” Pay up or else. Such extortion was enforced by vague but threatening press leaks.
The closest we ever came to seeing formal charges was the April Affidavit about a Merrill Lynch analyst. It complained that “as previously covered stocks such as Pets.com . . . plummeted . . . retail customers and the investing public were never advised to sell. The reason for this failure is at least in part the substantial unrevealed conflict of interest.” That was irrational claptrap. Analysts could not possibly advise selling a “previously covered” stock, and there could be no conceivable conflict of interest over a stock that was no longer being analyzed.
An April press release from Spitzer’s office feigned “dramatic evidence. . . . For example, a senior analyst writes: ‘the whole idea that we are independent of [the] banking [division] is a big lie.’” Actually, the big lie was Spitzer’s press release. The e-mail in question was about an executive confirming that the analyst was independent and free to downgrade a stock: “Mazzucco said he is fine with a 3-2 (I said to him the whole idea that we were independent from banking is a big lie — without banking this would be a 3-2 and he said ‘no-you guys are independent and can do what you want. I’m fine with that).’”
The affidavit claimed a Merrill Lynch analyst said there was nothing interesting about GoTo.Com (GOTO) stock except banking fees, but a Merrill Lynch customer just posed that as a barbed question. And GOTO was merely rated neutral, as likely to fall as rise. A top analyst’s comment about a fallen tech company being a “piece of s . . t” was followed by “Shame on me/us for giving them any benefit of doubt.” His e-mail to a subordinate about InfoSpace being “a powder keg” was persuading her to rate the stock lower. In short, Spitzer had no serious case. What he had was the power to smear the company in the press, cut the value of its stock by $10 billion, and threaten interminable criminal and civil litigation if they did not write a big check to Albany.
The Spitzer charges against Merrill Lynch, which were far more specific than subsequent attacks on other firms, have been so often uncritically repeated by the gullible press that it threatens to become established as a stylized fact among the intellectually lazy. Never let it be forgotten that Spitzer had no case that would even begin to stand up in court. But any procedure that might be bound by the annoying rule of law is not, of course, the way he prefers to play his games.
A particularly silly gripe added to spice up this settlement was about “spinning” allegations of favoritism in inviting business clients buy “hot IPOs.” Nobody really knew if an IPO would be hot or cold, of course, and nearly all IPOs have been cold as ice for three years. Small investors are kept out of IPOs because the SEC requires proof that you have a fortune to lose before you are allowed to buy such risky new securities. If you feel left out, I have some slightly used $12 IPOs that I would gladly sell for less than a dollar.
So what was this really all about? A self-chosen group of prosecutors with no legitimate legislative authority has begun rewriting national security laws at the state level through public threats and private deals. That’s a much more dangerous situation than we had before — when the victims were those who compulsviely accepted bad advice from stock analysts.
— Alan Reynolds is a senior fellow at the Cato Institute and a contributor to National Review.