Confidence Game - Christine Richard [35]
If the message Spitzer intended was “Read about yourself in the Wall Street Journal and you can be pretty sure we’ve got you,” that wasn’t the one Ackman took away from the evening. Instead, he focused on something else Spitzer said: “Short sellers have a critical role in our marketplace as long as—and here’s the critical caveat—as long as it is not part of a scheme or artifice, as long as it is not part of a manipulation that is based upon the dissemination of deceptive information.”
Chapter Six
The Trouble with Triple-A
Financed conduits supported by $1 trillion of asset-backed commercial paper were constructed on the basis of triple-A ratings that suggested—no, practically guaranteed—that the investments could never fail.
—BILL GROSS, PIMCO, NOVEMBER 2007
THE DAY AFTER Eliot Spitzer’s presentation at the Wall Street Hedge Fund Forum in March 2003, Bill Ackman and his lawyer, Aaron Marcu from Covington & Burling, were having coffee in Starbucks across from the attorney general’s office at 120 Broadway. Ackman was scheduled to begin testifying at 10 a.m.
Marcu and Ackman knew from press coverage that MBIA had complained about the Gotham report, though MBIA had never followed through on its statement that it would publicly identify errors in the report. The obvious question for regulators was whether Ackman had knowingly put false information in the report in an attempt to spread fear about the company and increase the value of his short position.
Ackman and his lawyer also knew from reading the Wall Street Journal that Spitzer was troubled by Gotham’s use of the credit-default swap market to place its bets against MBIA and Farmer Mac. Was it possible that Ackman’s intention in purchasing the CDS contracts was to cause a spike in prices and spook the market?
“I just want to remind you that you’re here to answer questions. There is no need to volunteer anything,” Marcu told Ackman. “You answer, and you wait for the next question.”
The questions started at 10:15 a.m. in a room on the 23rd floor with a view of a brick wall. Roger Waldman, the assistant attorney general of the Investor Protection Bureau, introduced himself: “This examination is being conducted by the attorney general of the state of New York, pursuant to Article 23-A of the General Business Law, more commonly known as the Martin Act.” Also present from Spitzer’s Investor Protection Bureau were attorneys Marc Minor and Lydie Pierre-Louis.
The Martin Act, a New York statute passed in 1921, gives the attorney general broad powers to investigate financial fraud. The law gathered dust for decades after it was used to prosecute so-called bucket shops, which took small investors’ money to make bets on stocks but didn’t actually purchase securities and often went bust. Then an attorney in Spitzer’s office, Eric Dinallo, dusted it off to use against some of the biggest firms on Wall Street.
Under the Martin Act, an investigation may be made public or kept secret, and suspects questioned under the Martin Act have no right to counsel. Although Marcu was permitted to accompany Ackman, he was permitted to advise him only on issues of attorney-client privilege. He could inform Ackman, for instance, if he believed that answering a question would cause him to reveal confidential communications between Ackman and his lawyers.
The Martin Act doesn’t require the attorney general to prove that someone intended to commit a crime, only that the person has committed one. The low bar to conviction is seen as one reason Wall