ON WALL STREET/Conor O'Clery: On February 4th, 1992, a young prosecutor stood up before a Manhattan jury and pointed at the defendants. "Most criminals don't wear suits but these men do," he said. "Don't let that fool you. These men don't go in with guns drawn, they go in with reputation. And they take that reputation to the bank."
The prosecutor, Eliot Spitzer, was successfully arguing an extortion case against reputed mobsters Thomas and Joseph Gambino, the Sopranos of their time. This week Mr Spitzer, now New York's top criminal justice official with a staff of 600, could easily have used the same phrases to castigate his current targets.
These are the analysts in the big Wall Street firms, the gurus of the tech revolution, who gave "tainted" advice to investors during the technology boom of the late 1990s, causing them to lose money while the analysts and their companies raked it in.
Usually, the Securities & Exchange Commission polices the financial district, threatening large fines as a deterrent against crooked dealings. This wasn't enough for New York's determined attorney general. Like a latter-day Eliot Ness, Mr Spitzer has embarked on a campaign to scourge the city of the seemingly untouchable masters of the universe. He has thrown the big investment banks into a panic by proposing to bring criminal charges that might actually put some big names in jail.
He stunned Wall Street when he called a press conference a few days ago to announce that, in a 10-month investigation of Merrill Lynch, the world's biggest brokerage, he had come across dozens of in-house e-mails showing that analysts had contempt for stocks they were encouraging investors to buy, something long suspected but never proven.
The most juicy e-mail bits are destined for Wall Street folklore, such as "nothing interesting about this company except investment banking fees", and "piece of junk," or simply "POS", meaning piece of something else, for stocks which Merrill was encouraging investors to buy. This was evidence of a "fundamental deception of the public", he said.
Bankers and analysts in the bars around Wall Street are asking, "Who is this guy?" Mr Spitzer is a 42-year-old Harvard law graduate, a Democrat whose office is decorated with pictures of Bill Clinton and Al Gore. He spent $4 million (€4.53 million) of his family's real estate fortune getting elected by the slimmest of margins in 1988. Driven and by some accounts humourless, he has taken on powerful sectors before, including the energy firms over acid rain, the police over racial profiling and employers over low-paid workers. He is in favour of the death penalty, which puts him at odds with New York liberals, but has taken on the gun lobby.
By hitting on Wall Street, the crusading prosecutor has taken on the biggest power base of all, the industry that makes Manhattan the financial capital of the world and provides New York with 17 per cent of its salary base. With an election coming up in November, this is a popular move with the small guy - outraged by evidence that investment firms privately advised big clients against investing in stocks they were publicly recommending - but not with political rainmakers.
"Anybody who thinks that going after the core industry of New York City in an election year is good politics, has it dead wrong," the attorney general protested in reply to accusations that he was courting votes.
Mr Spitzer's assault on Merrill Lynch is a sign of the times. The public has lost confidence in Wall Street, which is already suffering the worst slump in a quarter of a century and has seen 43,000 jobs disappear in the past year. It happens periodically when greed gets the upper hand. An earlier prosecutor, Rudolph Giuliani, hauled insider dealers off to jail in handcuffs 15 years ago to public acclaim.
This time the rot goes deeper. The collapse of the dot.com bubble damaged the credibility of the big investment houses where investors believe deceit had become part of the culture. Analysts and accountants are as trustworthy in the public mind as used-car salesmen. Enron ate away at the foundations of trust in corporate accounting and auditing ethics and executives at some of the blue-chips, acting with breathtaking arrogance and greed, have been exposed inflating profits through dodgy accounting and walking away with millions.
All this has contributed to a climate where regulation is back in favour to enforce the integrity of the capital markets. This is ironic as the Administration in Washington is laden with recruits from big business (including Enron) and dedicated to dismantling regulations wherever it finds them.
The Justice Department has thrown the book at Andersen, indicting the audit company on obstruction charges, and the SEC under a Bush appointee, Mr Harvey Pitt, and with its budget doubled, is going after chief executives big time.
The explanation was provided by budget director Mitch Daniels. Public confidence was vital to the successful operation of the markets, he said, and its maintenance was especially important for an Administration committed to strengthening markets.
Firms such as Merrill Lynch, which dismisses Mr Spitzer's findings as "just plain wrong", have been slow to reform but are now scrambling to restore confidence among investors, promising in future to analyse the analysts and repair the "Chinese wall" within their operations. Mr Spitzer, who is going after other finance houses, wants Merrill to concede it did something wrong, to change its research process and to give money back to injured investors.
The threat of criminal action for hyping stocks may prove one of the most powerful incentives for reform. One idea being promoted is that an analyst's reports should carry a warning like that on cigarette packets. It could say something like: "Believing this could be bad for your wealth."
