WHEN NEW YORK STATE ATTORNEY GENERAL ELIOT SPITZER started out on his quest to prosecute excesses in the financial markets, he was tough-minded but fair. We had just witnessed the debacles at Enron, WorldCom and elsewhere. The system needed a correction.
But over time, we have grown less confident that he is pursuing justice. His treatment of AIG’s Hank Greenberg, coming on the heels of the forced ouster of Greenberg’s son, Jeffrey, from Marsh & McLennan, is a case in point. Once again, Spitzer has charged in and discovered a pattern of practices he doesn’t like. He is applying a new set of values to reinsurance practices in place for decades. He reportedly threatened a criminal indictment of AIG to force Greenberg to quit.
Although Greenberg was our CEO of the Year in 2003, we are not defending him personally. We want to take a principled stand on whether CEOs have a right to due process. A basic feature of the U.S. system of justice is a stringent set of procedural safeguards to protect against overzealous or arbitrary prosecution. Yet in the atmosphere that Spitzer has helped create, the presumption is that CEOs are guilty€¦quot;if Spitzer says they’re guilty.
In dispute in the AIG case are transactions that may have reduced the company’s shareholder equity of $82.9 billion by as much as 2 percent. It’s not yet known if the total loss will reach that level, roughly $1.7 billion. Those transactions may have helped smooth the company’s earnings over a period of several years. But that’s not yet clear and we also don’t know if they were material to AIG as a whole. After Greenberg’s departure, the board ran up the white flag to Spitzer and declared the transactions “improper.”
Were they? One proper way to resolve this would be to create a policy framework with clear rules, which does not currently exist. Another way would have been for the Securities and Exchange Commission to negotiate an earnings restatement with AIG.
But Spitzer threatened a criminal indictment, which in effect would have put AIG out of business. Then he went on television to pronounce that the AIG transactions were “wrong” and “illegal,” which some legal scholars say is unusual. It’s not yet clear what the allegations are, much less the specific charges. So partly through the use of leaks to the media, Spitzer both charges and convicts in the court of public opinion. This is part of a pattern of overcriminalization that is of deep concern to many chief executives. The proper process is for judges or juries to convict defendants only after convincing themselves that a charge has been proven “beyond a reasonable doubt.”
At the same time, Spitzer’s political ambitions are becoming increasingly clear. He wants to use his record as attorney general to become governor of New York. Spitzer’s campaign office even paid Google to link a search for “AIG” to a Web site promoting his campaign before it was quickly taken down. In the same television show where he discussed the AIG case, Spitzer said he was “very close” to Hillary Clinton and didn’t rule out a run for the vice presidency or presidency of the United States.
In so doing, Spitzer created a reasonable doubt about whether he is using the legal process for political gain. An attorney general running for higher office is different than a senator seeking the presidency because there is a risk that the legal system becomes politicized and is no longer seen as adhering to principles of fair play and due process. In short, Spitzer has a classic conflict of interest. The only way to resolve it is to resign as attorney general to pursue his political goals.
Spitzer has a right to be ambitious, but not at the expense of the legal principles he is sworn to uphold. Ironically, the cornerstone of Spitzer’s actions has been an attack on conflicts of interest. If he wants to set new, higher standards of conduct in Corporate America, he must himself adhere to those expectations.