Elliot Spitzer: Sore Loser, Legal Tyrant (UDPATE)

Previous Post: Elliot Spitzer: Sore Loser, Legal Tyrant
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OpinionJournal.com is great, but I really wish the Wall Street Journal would makes its editorials available without a subscription for at least a week. There are days when those editorials have more underrported news than the New York Times has in an entire day’s paper.

This is one of those days. First, on France’s crazy “labor protections” and protectionism. Now this (yup, requires subscription), on New York Attorney General and gubernatorial wannabe Elliot Spitzer’s latest adventure, where the target strikes back (bolds are mine):

J. & W. Seligman & Co., an asset-management firm, recently asked a federal court to enjoin Mr. Spitzer from further investigating its mutual fund fees, an area of regulation historically reserved to the federal Securities and Exchange Commission. But just as interesting is how Mr. Spitzer came to look at Seligman’s fees in the first place. According to the complaint, the Attorney General was using the fee issue to coerce Seligman into caving into his demands in a separate probe.

That investigation had to do with market timing, the practice of trading quickly in and out of a fund in order to take advantage of “stale” prices. Market timing isn’t illegal, but since stale-price trading benefits some investors at the expense of others, many funds have shunned it as a bad business practice.

That includes Seligman, which in 2003 terminated an agreement with a brokerage firm that had briefly been market timing several Seligman funds. Seligman informed its independent directors and conducted an investigation. Seligman disclosed what had happened and made financial restitution to funds affected by the market-timed trades. And it did all of this voluntarily, without the prodding of regulators.

Yet none of this good behavior counted for much with Mr. Spitzer, who seems never to have heard the phrase “prosecutorial discretion.” In 2003 Mr. Spitzer began one of his legal crusades against market timing and late-trading, and several large investment companies agreed to atone for their sins by reducing their mutual fund fees. Never mind that fees have absolutely nothing to do with market timing, or that by dictating private-sector prices Mr. Spitzer was behaving like some economic commissar.

To its credit, Seligman was a holdout. It was reluctant to pay more to settle with Mr. Spitzer when it had already compensated its own fund investors. As a smaller firm, it also had less cash to pay Mr. Spitzer to go away. Meanwhile, the AG kept increasing his settlement demands, including the preposterous requirement that Seligman turn over its fee-setting to an outsider (presumably responsible to Mr. Spitzer). So Seligman just said no.

A normal prosecutor — that is, one who recognizes limits on his power — would then either drop the case or go to court. Mr. Spitzer typically finds courtrooms inconvenient, however. So according to the Seligman complaint, the “Defendant [Mr. Spitzer] then threatened that, if Seligman did not accept its required conditions, Defendant would expand its investigation from frequent trading into what it termed ‘excessive’ advisory fees.” In other words, Mr. Spitzer made an offer he thought Seligman couldn’t refuse. Within days everyone from independent directors to its principal shareholder were hit with subpoenas. Some requested up to seven years of documents about Seligman’s advisory fees.

Seligman has now responded by going to court itself, questioning Mr. Spitzer’s legal authority to do any of this. Congress invested the SEC with the power to oversee mutual fund fees — for the simple reason that at least in this area investors are best served by companies working under uniform rules rather than the political agendas of 50 different state attorneys general.

…. Yet in standing up to Mr. Spitzer, the company is doing its business peers and the rule of law a favor. Unquestioned by a media that live off his news leaks, and unchallenged by businesses afraid of retribution, Mr. Spitzer has expanded his power to usurp the legitimate roles of elected officials and federal regulators. Kudos to Seligman for blowing the whistle.

Can you imagine what Spitzer might be like if he ever gains the power inherent in the New York Governor’s office?