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Why Wall Street's tech swindlers don't go to jail

More Spitzer phlegm, feedback and fraud

Letters In one of many very funny moments in Bowling For Columbine, Michael Moore's film about fear, Moore asks the producer of Fox TV's tacky Cops show (the one where cameras follow the police as they go around arresting black people) how he might make a show about white collar crime televisually appealing.

"Maybe if they took their shirts off, and threw their cellphones at the cameras?" the producer replies.

He'd just agreed with Moore that the Ken Lays and Jack Grubmans [$30 m payoff$1m school fees*] aren't likely to have their front doors kicked down live on Fox TV. Nor are they likely to serve porridge: the Cops producer explaining that's because they're part of the community.

Well I live on a pretty interesting block, here. The city hangs banners from the lampposts announcing that it's "Theaterland", and the perpendicular block has San Francisco's densest concentration of chi-chi commercial art galleries. A block and half in the other direction, on O'Farrell Street, people openly smoke crack. (You have to look closely, as crack pipes are quite discreet). Now I'm not sure which part of "the community" he means.

Neither block is remotely threatening, and the crack smokers are people recovering from traumas who've lapsed into the, er ... lifestyle from less punishable vices. And most of the others in this part of the neighborhood are almost-broken up people, who you can see vowing not lapse into an addiction, and so exhibit a kind of courage and courtesy on a daily basis that Wall Street traders like to claim as their unique preserve. And hey, at least the crack people look like they're having fun - compared to the long faces you see in the Financial District.

Judging from your letters, it's exactly this absence of a custodial sentence for the swindlers, who mugged us for billions of dollars - more than any single recorded street crime - that makes you think Spitzer's settlement with the tech stock boosters is a hollow victory. We ran a selection here.

However Spitzer, who a friend described as "a socialist Torquemada" (more in style, perhaps) but who I nevertheless think is quite amazing, also has many defenders.


"Eliot Spitzer, I believe he deserves a medal," writes Julian Lewis-Booth. "No, he has not been able to go as far as we would have all liked to see him go, at least he is making a good go of it!"

"I personally find it very sad that he is one of a very few people trying to make sure that these large government supporting conglomerates does not get away with buying the influence they need to avoid prosecution or failure."

"I hope that he manages to stay in his position, can you imagine the back biting, sniping and attempts to corrupt or indicate that he is corrupt going on at the moment?"

I bet. Nothing frightens ersatz-populists like a real populist. Since the swindlers, who are fortunate not find themselves swinging from lampposts, are happy to call it a draw.

And one honest fund manager had this to add:

"I have been working for about a decade on Wall Street (as a risk manager) and sold most of my holdings long before 2000 - as well as advised others to do the same - but have seen many lose their hard-earned retirement pensions and then their jobs as a result of the lack of accountability of American industry and its supporting capital markets. Many times I overheard - as far back as the mid-nineties - investment bankers discuss the ridiculous valuations of market indices and the manner in which Wall Street was fueling those valuations with meaningless "research".

"Congratulation on your article. This is indeed one of the few insightful - and insightful it is - articles I have read dealing with the settlement and the environment that brought it about. I am particularly impressed with the manner in which you weave what effectively has been the emasculation of political discourse into the conditions that have brought about the crisis American enterprise is now facing, including a profoundly corrupt capital market infrastructure, wholesale transfer of wealth to unaccountable executives from individual shareholders, and so on and so forth."

Here are some alternative cures:

"He saw the problem but missed the cure," Steve Guenther from Tampa, Fl. reminds us:

"These Wall Street guys throw money around like toys. They get some cash, stash it buy a house in Florida, fund trusts for the kids and have the company pay fines.

"They need to be treated like the junkies and street punks that they are. Put them in Orange jump suits and have them picking up trash 7-9am on Wall Street and in front of the Capitol."

"Would the next Enron happen, when he sees the last one getting spit on while picking up dog poop?"

Continuing the emetic theme, Tres Melton encloses a detailed plan for ridding your farm of rats, and concludes that Spitzer's crusade was nevertheless worthwhile:

"Unfortunately the concessions that Mr. Spitzer has extracted amount to nothing more than a plastic bucket to store the sweet-feed [rat bait] in; something the rats -- or their lobbyists -- can gnaw threw in short order."

However, he adds:

"Mr. Spitzer: thanks for the effort. You did something that no one else even attempted. Please be vigilant though as you have not solved the problem; merely given the rodents pause. Although it doesn't count (I'm a Californian), I'd like to give you the highest praise possible: my vote."

William Tansill suggests an "eat your own dogfood" remedy :

"During one of the world wars, a dilemma arose -- the folks who packed parachutes weren't the ones whose lives depended on them. In order to keep the 'chute packers focused, the army instituted a rule -- every X'th parachute packed by a worker was pulled off the line, and the worker was made to jump with it. As I heard the tale (unverified by me), there were very few 'chute failures after the new policy was instituted.

"Along the same lines, I think it would be a fine idea to mandate that companies touting a stock must commit to hold that stock in portfolio. So long as their analysts rated the stock a strong buy, buy, or hold, the company would be forbidden by law from selling it. The amount of stock to be bought and held in portfolio should be in proportion to the underwriting firm's participation in the deal."

"You want to tout a stock? Fine. But you must then assume the same risk as those you advise. Not willing to buy shares of XYZ corp.? Hmmm -- that should be a signal to the buying public that there's a rat somewhere in the wood pile."

Which is very interesting, in that it challenges the speculative nature of the markets. In the old days, people used to hold shares for a very long time themselves, counting on annual dividends as a measure of performance. Whenever I can, I ask every tech CEO this question, why they spend billions of dollars on buying back their stock, own whenever I get the opportunity.


Now here's an even more interesting take, from an attorney at a firm involved in the negotitations and who we must not name. A reader, Craig Taylor of Austin, Tx., had asked.

"And last, if what went on was so horrible, why weren't the people responsible prosecuted under criminal fraud laws? The laws exist. If more than a few people were in it together the infamous RICO laws could have been used."

"What the brokerage companies did was completely immoral. It violated any concept of business ethics. But it made them lots of money. Almost no one went to jail. Any questions?"

Yes, you've raised a good question. Why weren't the fraud laws invoked. We threw out a private feeler and we got this very detailed reply from NYC:

"I was surprised by the response of your readers. I've been pretty impressed with Spitzer since I found out about the McAfee suit last winter. I took a look at his record at the time and I remember thinking it was pretty impressive. Certainly for an attorney general -- he seems to be one public official who actually takes his job seriously. I thought the speech before the analyst award dinner was excellent."

"The RICO statute doesn't apply. You need to take a look at the definition of "racketeering activity." Basically none of those things could be applied to what the banks have done. They all require either some kind of physical violence, outright fraud (which I think they would be unable to prove), or some heinous crime like slavery or child porn. The only new crime under RICO is "association" with a criminal organization. The organization must be doing some highly illegal stuff before it kicks in."

"As far as your readers' response to the settlement, people are missing quite a bit. First of all, one reader notes that Salomon's fine was less than one day's profit. First of all, even with the published figures, this is wrong.

"Second, Salomon Smith Barney is a subsidiary of Citibank, and all of the figures I've seen divide Salomon's fine by Citibank's profits. Citibank is _much_ more than an investment bank. Salomon's 2001 income was $2.6 billion, according to their own annual report. This makes the fine 12% of net income. Sounds a bit more fair to me.

"Two things will make this settlement effective: first, Spitzer is going after individual analysts whose conduct was particularly bad. Second, the banks have promised to separate their analyst and investment banking activities. This, at least so far, is having a huge effect. Friends of mine in investment banking say that smaller banks, which do not have an independent analyst business (that is, their analysts work solely for investment banking and do not have a conflict of interest), are at a great advantage right now in getting deals.

"The big banks are having a lot of trouble adjusting their business practices."

So maybe if it's hurting, it's working? ®

* "Citigroup acknowledged the
attempt by Mr. Weill, who was an AT&T director, to help Mr. Grubman's children get into the school but denied it was connected to the analyst's upgrade of AT&T's shares." Oh, my - education is getting expensive.

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