Eliot Spitzer and the Internet bubble

Eliot Spitzer, Governor of N.Y.

(Credit: N.Y. State)

Five years ago, then N.Y. Attorney General Eliot Spitzer was involved in an investigation into conflicts of interest between research and investment banking at ten of the nation's top investment firms during the Internet bubble.

The landmark $1.4 billion settlement helped put Mr. Spitzer on a fast track to the governor's mansion, but that's not the whole story.

How slimy can you get?
To get a feeling for the depth of the scandal, here's one story that came out during the investigation. It centers on then Citigroup Chairman and co-CEO Sanford Weill and telecom analyst Jack Grubman of Citigroup's Salomon Smith Barney unit (SSB).

In 1999, Weill asked Grubman to take a fresh look at his "neutral" rating on AT&T. It seems that Weill was engaged in a boardroom battle with co-CEO John Reed and needed the support of fellow board member and AT&T CEO Michael Armstrong.

At the time, Grubman was trying desperately to get his kids into New York's exclusive 92nd Street Y preschool. So Grubman asked Weill if he could pull some strings at the school. In the end, Citigroup donated $1 million to the school, Grubman's kids got in, and Grubman upgraded his rating on AT&T to a "buy."

Grubman admitted to all of this in an email that was leaked to the Wall Street Journal in 2002, although he later claimed he was just boasting to a friend. Both he and Weill later denied that there was any connection between these events.

Undisputed, however, is the $67.5 million Grubman earned during the Internet bubble, or the $790 million in investment banking fees he helped his company earn, in no small part by issuing false analyst reports and recommendations.

As part of Spitzer et al's settlement, Citigroup SSB coughed up $400 million in fines and telecom analyst Jack Grubman was permanently barred from the industry and made to pay back $15 million.

Never mind that that was a drop in the bucket for both Citigroup and Grubman, or that Spitzer failed to indict anybody at Citigroup or any of the other investment banks on fraud or any other criminal charges.

I could be wrong, but it sure seems like Spitzer managed to pull off a masterful coup by furthering his political career without sending anyone to prison and pissing off the investment banking powers-that-be in the state he hoped to someday govern.

I guess what goes around really does come around.