Thursday, November 18, 2004

Behind Spitzer's crusades

The Wall Street Journal editorial page ran an excellent piece on NY State Attorney General Eliot Spitzer this week. In "Mr. Spitzer's Allies", the WSJ questions, in the context of his current crusade against the insurance industry:

...a bigger mystery is who gains from Mr. Spitzer's more sweeping assault on basic industry practices. So far as we can see, the answer is that these anti-corporate campaigns largely end up benefiting politicians and their allies in the trial bar. The mutual back-scratching between those two camps, conducted in full view on a growing number of public policy issues, deserves far more scrutiny.

While Spitzer's investigations did uncover illegal bid rigging which is egregious and whose perpetrators should be punished, his original 'target', contingent commissions in the insurance industry, were not only well known but there is insufficient evidence that it was bad for the industry:

...The AG's outrage is strange considering that "contingents" have been around for decades and have only grown more transparent over the years. State insurance regulators have never moved to bar them. Even the main industry group for insurance customers (the supposed victims of contingents) hasn't condemned the payments.

Meanwhile, Mr. Spitzer 's suggestion that insurance clients will get a better deal without contingents is debatable, to say the least. Insurers don't pay contingents to brokers for nothing; they pay because these middlemen provide a service in vetting clients and guaranteeing good return business. Insurers will either have to pay someone else to do that job, or swallow more risk. Either way premiums will remain as costly, if not costlier.

Here's the rub:

So why the Spitzer campaign, and why now? Consider the following timeline, dating back more than five years. That's when contingents first became a subject of public debate. Insurance clients were criticizing the brokerage industry for not divulging enough payment information, and so starting in 1998 a leading brokerage trade group began recommending full disclosure, while the large brokers entered into formal agreements with clients to do so. The New York state regulator even issued a rule for greater transparency.

The industry's reward for making these adjustments was to become the new trial-bar target. Several law firms filed test lawsuits -- arguing that contingents were unfair business practices, "kickbacks," or worse -- in tort friendly arenas such as California and Illinois. Things went quiet as cases worked their way through the system -- that is, until last fall.

That's when the tort bar got a few green lights from the judiciary in Illinois.
Within months, Mr. Spitzer had launched his own investigation into contingents. (It wasn't until September that the AG stumbled across the illegal bid-rigging.) A few of his usual partners-in-lawsuits, Connecticut AG Richard Blumenthal and California insurance commissioner John Garamendi, weren't far behind. The tort bar seemed to be apprised of various probes. One partner at Anderson, Kill and Olick -- behind a California suit against insurers -- said in May that he'd been contacted earlier in the year by "regulators" from two states about contingents.

By August -- two months before Mr. Spitzer announced his charges -- the giant of class-action firms, Milberg Weiss, had landed a lawsuit against the top brokers. When Mr. Spitzer finally filed his complaint, it was met with glowing headlines to add to his scrapbook for his upcoming Governor's run. And Milberg was perfectly positioned to expand its lawsuit within a few days to include a half-dozen more deep pockets, ahem, brokers.

* * *
In an interview on Friday, Mr. Spitzer told us he didn't have any knowledge of the lawsuits save "one case filed out West" before he began his investigation, and that what inspired his probe was a letter from the Washington Legal Foundation. He said his office may have spoken to people in the trial bar industry, including Eugene Anderson (of Anderson, Kill and Olick), though solely "to understand the issue" at the beginning of the probe, adding that "we do not work with the plaintiffs bar."

. . . regardless of motive and communication, there certainly is a clear community of interest at work: Trial lawyers target an industry; politicians later get media kudos for pursuing said industry; lawyers, in turn, find their original cases bolstered in court.[emphasis mine] The targeted industry, meanwhile, has every incentive to settle the cases to limit its headline risk and put the matter behind it -- never mind that most of the practices in question have been, and still are, perfectly legal.

The lawyers and politicians certainly do well, but about the broader society we have our doubts. The legislators or appointed regulators chosen by voters to make these public policy decisions are made irrelevant by Mr. Spitzer 's legal force majeure. The companies involved pay a huge ransom to the trial bar, while shareholders watch the value of their holdings plummet, employees lose their jobs, or consumers pay more for goods and services once companies are forced to pay billions of dollars in settlements. [emphasis mine]

Non New Yorkers may not remember that Eliot Spitzer's father essentially bought him the Attorney General seat in NY. Spitzer's father spent millions in his campaign for AG - highly unusual for a position where most voters really care little. Since then Spitzer has shamelessly tapped into the post-Internet bubble and Enron 'rage' to go after as many high profile and unpopular targets as possible.

Has he done some good? Yes. His relentless crusade against investment banks and analysts has led Wall Street to change some ill-advised practices. But none of those practices were secret or illegal. You had to be pretty clueless not to realize that analyst-investment bank-client relationship. And, then, as ever, fools are easily separated from their money. So, who benefits? Certainly the trial lawyers and Spitzer himself who has made no secret his desire for the Governor's mansion in 2006.

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