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Last December the state attorneys general gathered in a lodge next to the Pacific Ocean for their annual weeklong winter meeting. They visited Disneyland with their families, participated in a discussion on early childhood violence, and met a delegation of Mexican attorneys general. On Thursday night a group of them went to Dave & Buster’s comedy club, where the stand-ups discovered who was in the audience, and so, had the chance to make fun of Alaskans, Arizonans, Arkansans and so forth. But the comics didn’t have an opportunity to mock New Yorkers. Eliot Spitzer, the Empire State’s top law enforcer, wasn’t in the house. Actually, he was on a red-eye, flying west just to attend the Friday morning executive session on a matter he didn’t think was very funny. The National Association of Attorneys General was weighing a multimillion-dollar windfall from the states’ global settlement with Big Tobacco. After dividing up their legal fees, the attorneys general had $50 million left in the kitty. Where should it go? Several attorneys general proposed using this found money to endow a new nonprofit foundation to support the training of their staffs. But Spitzer thought the money should go where it would do the most good — to health care. Runner-thin and ready to joust, Spitzer rose from his seat. Abandon the foundation, he said. The AGs’ integrity was at stake. Divide up the $50 million and send it back to the states. Use the tobacco money for public health work related to smoking. A foundation, he warned, could be hijacked for their own ends by a cabal of attorneys general. Indeed, he added in a rising voice, that week’s very gathering should serve as a caution. NAAG’s executive board had authorized the host of the meeting, California Attorney General Bill Lockyer, to seek an underwriter for the Friday night banquet; Spitzer argued that NAAG had made a grave mistake by accepting sponsorship from a local real estate developer. Lockyer, who had been planning the event for weeks, took umbrage. “You have a hell of a lot to say for someone who doesn’t give enough of a f–k to show up except when you want to be disagreeable,” he blurted out, according to several others sitting in the circle of chairs that day. Spitzer, 15 feet away, appeared perplexed. The attorneys general had heard him make these points all year, during his brief appearances at previous meetings and in several memoranda to the group. Just 10 days earlier, his staff had faxed to the other attorneys general a meticulous eight-page argument — a legal brief, really — about the problems he saw in the executive board’s decision. He hadn’t said anything in particular about Lockyer. Why was Lockyer attacking him for making an important argument? That was what eyewitnesses thought his expression conveyed. What he actually said to his antagonist was another matter. The two men began hollering accusations, and a few expletives, while the others gawked. At least a little unspoken history animated their spat. A month earlier, Spitzer had decided to settle New York’s suit against Microsoft Corp., taking eight other states to the sidelines with him. The move had been a blow to several attorneys general, including Lockyer, who were still in the high-profile fight. After five minutes of back and forth, Spitzer barked: “You want to step outside, that’s fine! I grew up in the Bronx!” “No problem,” attorneys general recall Lockyer shouting back. “I grew up in East L.A. Let’s go!” Finally, however, the two ran out of steam. They left the room to talk in private. Whoever might have won a real brawl, Spitzer got clobbered in the vote. The attorneys general who turned up for this session (many knew their votes weren’t needed and didn’t bother to attend) supported the foundation 30 to 1. They did make one concession, adding language to the foundation’s bylaws to outlaw underwriting by for-profit companies. But Spitzer clearly had taken the audience for granted. Says William Sorrell, the attorney general of Vermont, “Eliot hadn’t been around for a couple of days to schmooze people on his concerns.” A failure to schmooze is an odd problem for a Bronx native, or any gifted politician, but it’s one that Spitzer has yet to solve. Only now it’s haunting him in a much higher-profile dispute than one over legal fees. As everyone with a newspaper subscription or a cable connection knows, last spring Spitzer famously wrested a $100 million settlement from Merrill Lynch & Co. Inc., the brokerage house he had accused of defrauding the public. Wielding stacks of incriminating e-mail, Spitzer also won for himself the sort of publicity that not even the 43-year-old son of a rich man could buy. With one bold stroke, he became the most prominent state attorney general in the land. But that settlement may be in jeopardy because it requires the unanimous consent of all 50 states plus the District of Columbia and Puerto Rico. After three months, 20 had not signed. It turns out that once again Spitzer had neglected to schmooze the room. PROBLEM SOLVER Eliot Spitzer was raised to be a problem solver, not a casual talker. His father, Bernard Spitzer, trained as an engineer and made a fortune in real estate dealings. Spitzer was raised in Riverdale, N.Y., a wealthy enclave in the Bronx. The dinner table was a debating venue for Spitzer and his two siblings to discuss social issues. He took those habits to Princeton University, where he was elected class president, and to Harvard Law School. Blessed with a native confidence, Spitzer apprenticed during law school with Ralph Nader, Alan Dershowitz (on Claus von Bulow’s appeal), and the New York attorney general’s office, in its antitrust division. He then clerked for a federal judge, followed by a two-year stint as an associate at New York’s Paul, Weiss, Rifkind, Wharton & Garrison. In 1986, he joined the New York County (Manhattan) district attorney’s office, the latest in a long line of very bright and aggressive young lawyers to sign on with Robert Morgenthau. Spitzer became Morgenthau’s chief labor-rackets prosecutor in 1991. Even at this early stage, Spitzer was as interested in shaping policy as he was in fighting crime. When he prosecuted the Gambino crime family for extortion in its attempts to control trucking in New York, he passed up the archetypal white-hat opportunity of sending mobsters to the big house. Instead, he restructured the industry to cut out the Mafia; as part of the plea deal, he let the mobsters themselves go home after paying $12 million in fines. After that case ended in 1992, Spitzer joined Skadden, Arps, Slate, Meagher & Flom as an associate. Just two years later, however, at age 35, he left to mount a long-shot bid for state attorney general. He lost handily, despite spending $20 a vote. He became a partner in a start-up antitrust boutique with Lloyd Constantine, his onetime supervisor at the New York attorney general’s office. Spitzer didn’t return to Skadden Arps, says Constantine, because defense work didn’t play to his strengths: “He’s more of an aggressor, a prosecutor, a protagonist.” He was also more of a candidate — at least more than a Skadden Arps workload would allow. For the next four years, he mixed litigation with trips throughout New York’s 63 counties, and in 1998 he squeezed past four other Democrats in the primary and Republican incumbent Dennis Vacco in November. Money helped: Spitzer, with $9.7 million almost entirely from friends and family, outspent Vacco by more than $3 million. By most accounts, he has been a successful attorney general. A victor by less than a 2 percent margin of the vote, Spitzer moved quickly to build a first-rate staff of seasoned criminal prosecutors and refugees from Wall Street firms. In supervising 2,000 employees working in 15 geographical bureaus, he’s been decisive: attacking alleged corruption at Hale House, a sacred cow charity that was supposed to help babies born to addicts. He’s been quixotic: starting litigation against gun manufacturers. He’s pushed his borders: suing power plants in the Midwest for foul emissions that allegedly dump acid rain on New York. And he’s been sure-footed around headline writers, scoring big with such crowd pleasers as winning backpay for grocery delivery workers who were denied the minimum wage. “He almost creates an engineer’s model of how to solve the problem,” says Carl Mayer, a Princeton roommate and his 1998 campaign manager. Many of his cases resemble his Mafia prosecution. He’s less interested in scalps and more interested in systemic change. It’s telling that he didn’t run for the legislature. Spitzer doesn’t like to work in committees, says his old boss Constantine: “He has a strong sense of what is right and what is wrong and what should happen. And now he has the ability to make that happen.” Yet, as Spitzer is learning, that formulation is too simplistic. No attorney general is an island. The 50 state attorneys general and their thousands of staffers have become an important force in litigation. Although elected separately, they often work together, like white blood cells signaling one another to attack a virus. An assistant attorney general puts word of a potential problem on an encrypted electronic bulletin board administered by NAAG, and others start to stir. During the past decade, the attorneys general have formed multistate task forces on everything from auto rentals to magnetic mattresses to termite control companies. More recently, they have successfully taken on a string of larger targets. Besides the tobacco and Microsoft cases, the attorneys general have settled coordinated complaints against Citibank, Bridgestone/Firestone, Reader’s Digest and Walgreens. As Spitzer privately wrote to his colleagues last year, “Undoubtedly any corporation of significant size will have a matter pending in one of our offices.” TARGETING MERRILL But like politics, most of an attorney general’s work is local. From his perch at 120 Broadway, Spitzer opened an investigation of Merrill Lynch, a lower Manhattan neighbor, in mid-2001, prompted by news reports and tips from friends in the financial world. Just days after the dustup with Lockyer, The Wall Street Journal broke the story of the probe. By February 2002, Spitzer says, he had concluded that the company’s now-famous e-mails indicated an industrywide problem. The majority of the 30,000 e-mails he subpoenaed may have displayed, as one securities defense lawyer says, “Wall Street chest-beating,” but at least some stated directly that analysts had allowed investment banking considerations to affect their reviews of stocks. In mid-March, Spitzer phoned senior SEC officials to see if they had any imminent enforcement actions against stock analysts. Spitzer says that he told the SEC officials that the e-mails showed Merrill with its pants down. “They had no problems with our proceeding,” Spitzer recalls. “I don’t think back then any of us realized the effect the release of the e-mails would have,” he says. The SEC declined to comment. Leaving little to chance, Spitzer personally called Merrill in March to warn in-house lawyers that he had enough evidence to make a fraud case under New York’s tough Martin Act (which doesn’t require proof of intent to deceive). He was ready to settle, but had conditions: “The e-mails will be released in the context of a settlement where you look reasonably good and that says that you tried to confront the problem,” he recalls telling them, “or they’ll be attached as exhibits to an accusatory instrument. It doesn’t seem like a difficult choice to make.” He also demanded a substantial fine. A series of negotiations followed. When Spitzer sat down at the table he saw familiar faces staring back. The securities firm’s outside defense counsel was Skadden Arps, and one of the lawyers working on the stock analyst case, David Zornow, had been Spitzer’s boss at the firm. But as Merrill would soon learn, with Spitzer, familiarity doesn’t breed deference. After the sides had talked for two weeks, Spitzer decided not to wait to see how week three would go. On Monday, April 8, he called a press conference to announce that a New York state court judge had given him a temporary restraining order blocking Merrill from issuing any further research reports. And then he delivered the coup de grace: He released transcripts of the incendiary e-mail from stock analysts who, among other things, referred to the high tech companies they were touting as “such a piece of crap!!!” Merrill was aghast. While speaking at a securities conference the next day, Skadden Arps partner Edward Yodowitz groused that the TRO was an unnecessary provocation. Spitzer says that he wanted the bank to face the pressure of imminent public depositions, which the Martin Act allows. An audience of angry investors was already riled by other scandals like Enron Corp.’s accounting, and thus would presumably be receptive to details of venality at Merrill. Merrill refused to comment or permit Skadden Arps lawyers to speak for this article. Spitzer was angling for action from other regulators as much as for headlines. “When something like this starts in a regulated industry, it’s like a cue ball that just bounces all around,” says a New York defense attorney connected to the case. Spitzer surmised that his action would pressure other agencies to follow him. Sure enough, two weeks later, the SEC, the New York Stock Exchange, the National Association of Securities Dealers, and the 49 other state securities cops all announced that they were collaborating on an investigation with Spitzer. The U.S. Attorney said that it was scrutinizing the company, too. Because he possessed the rude evidence, a tough law, the jurisdiction and easy access to the financial press, Spitzer figured that Merrill would want to settle quickly. On May 21, after six weeks of roasting in Spitzer’s spotlight, Merrill agreed to pay a $100 million fine and to restructure its research department. UNFINISHED BUSINESS That was the first draft of the story. Spitzer had solved a problem. He looked tough yet sensible, giving the company probation but giving investors the e-mails — evidence enough for their private lawsuits to survive Merrill’s motions to dismiss. Three months later, the securities firm was facing 90 class actions and possible federal criminal action. And the New York attorney general, signaling his undimmed ambitions for a second term, moved on to other issues, like thwarting efforts by the Bush administration to change environmental protection rules. But Spitzer had made one miscalculation with Merrill. The company had demanded that all 50 states, Puerto Rico and the District of Columbia agree to the deal. Instead of negotiating a more lenient participation rate, Spitzer agreed; he liked the idea of unanimity. Also, a united front, he thought, would calm the fears of federal regulators that the states were about to fragment securities law enforcement. No previous multistate settlement required anything close to 52-jurisdiction consent, say veterans of multistate litigation and enforcement. Almost always, a couple of states decline to join, says John Perkins, a former securities commissioner in Missouri and onetime president of North American Securities Administrators Association: “You’re not going to tell the great state of Timbuktu how to do its investigation.” But Spitzer agreed to the condition without sounding out key members of NASAA. Although NASAA had joined Spitzer’s posse, the group opted not to play a key role in the negotiations. Eric Dinallo, the Spitzer deputy who headed up the Merrill investigation, is one of six members of a task force that NASAA chose to look into the analyst issue. He checked many elements of the proposed Merrill deal with his task force colleagues — the size of the fine, for instance — but not the requirement for perfect participation. “That was really Eliot negotiating that,” says S. Anthony Taggart, securities director in Utah’s Department of Commerce and a task force member. Not only did Spitzer not secure the other states’ agreement to the deal before it closed on May 21, he didn’t reach out to the states afterwards. His office didn’t send evidence to the others to evaluate without being asked, nor did it regularly solicit their concerns. Spitzer said that he would leave the details of listening to states’ qualms to NASAA, even after a couple of states announced publicly that they had doubts about the deal. Its staff could ask his office to participate as necessary, he said in early June. Why NASAA and not his team, the pact’s negotiators? His office had briefed NASAA staff on the settlement, he said, and as regular intermediaries among the securities cops, they were best positioned to counsel the holdout states. “It’s appropriate that they take the lead,” says Dinallo. However engineer-like Spitzer’s mind may be, he failed to see that the deal had a faulty incentive mechanism. Once a state signs, its law enforcers commit to end all investigations. If too many states hold out and Merrill refuses to pay the money, those early signers could be out of luck — without money, and effectively unable to bring a case. The logical consequence, says one regulator: “I should wait until the 49 other states sign up, or else I may not get any money.” The differences among the states was another problem. Only four besides New York vest securities oversight with their attorneys general; in other states, a different official, often a banking commissioner or secretary of state, controls securities regulation. By signing the deal, those securities cops would bind their states not to take criminal action — in many states, that’s a decision that only the attorney general can make. On July 10, Spitzer acceded to requests and made a conference call to the attorneys general to explain the deal so that they could assess it, too. As for his primary audience, the securities regulators, Spitzer only began wooing them at a meeting on July 27 in midtown Manhattan. Spitzer’s decision not to consult the other states could prove to be more than a symbolic mistake. As of the Aug. 9 deadline that NASAA had imposed on itself, 31 of the 52 jurisdictions had signed the deal. More have followed; but if they all don’t, Merrill and Spitzer may be back at the bargaining table. Spitzer says that he is confident that all the state securities cops will sign, adding that the deal protects consumers and makes systemic changes. Also, it’s a good payday: The other 51 venues stand to receive between $500,000 and $5.5 million (based on population). It’s not that Spitzer doesn’t know how to work a room. For the past 10 years, he’s done lots of schmoozing — in New York. The week after the Merrill settlement, for instance, Spitzer presented scholarships at an event for New York’s Puerto Rican Bar Association. During the cocktail hour, Spitzer introduced himself to his Republican Party opponent for attorney general, Dora Irizarry. Then he introduced himself to the two fresh-faced Republican operatives working on her campaign. In an amiable, we-have-something-in-common manner, the candidate asked them whether they knew all the rest stops along the New York State Thruway. No, they said. “Well, they’ll get very familiar,” he said. “I have a stack of those paper mats you get in each stop that has its name on it. I kept those in the back of my car, and I still have them at home.” Ironically, the honoree at this event was a lawyer from Merrill, Carlos Morales. Skadden had spent $3,000 for a table, Merrill’s legal department had spent $5,000, and Morales himself $2,500, all for the delight of listening to Spitzer give a speech, albeit not about Merrill. From the podium, Spitzer toasted Morales, saying it was good to see him over a drink, rather than a pile of papers. Afterwards, Morales mused about the coincidence — without so much as a smile: “That’s how life is sometimes.” By that time, the attorney general had schmoozed and waved his way across the room and — full-speed ahead — stepped back into the streets. Now, as he’s become better known beyond the Hudson River, he’s got plenty more people to meet. Some of them are his fellow law enforcers, and he may want to stop and listen to what they have to say.

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