Eliot Spitzer, attorney general of New York Investment Protection Bureau, was the leading regulator who changed the way many Wall Street firms do business. What he accomplished was nothing short of extraordinary – he has not only stood up for the investors against Wall Street giants, but he did so in such an aggressive but rightful manner that required much courage and sophistication.
Many criticized Spitzer for his overly aggressive indictments and actions against Wall Street firms, which consisted releasing the Merrill Lynch’s incriminating emails on the national television as well as releasing firms’ civil charges to public before the court ruled on the case. However, his rationale behind it was that many Wall Street firms have taken shelters under legal settlements – usually led by SEC or other government regulation agencies – that would withhold the scandalous details of their charges and only require firms to pay some fines. These firms’ reputations would remain intact and the public would not have any awareness of the “corrupt business models” that many of these firms have been practicing. That is why many firms continue to make fraudulent, deceitful deals that would rip off their clients, and drive up their profitability, knowing that the worst case scenario is them getting caught and having a pay some type of fine to settle the case.
Therefore, Spitzer releasing the incriminating details of Wall Street firms to the public, though a bit unorthodox, is fair in my opinion. He did so for a rightful reason – to use the power of publicity to implant fears of committing frauds into Wall Street executives’ minds. He wanted to build a stronger deterrent against Wall Street firms’ ill practices. In addition to that, Spitzer’s actions are also legitimized by a rarely known New York State law called Martin Act. This Act, once invoked by attorney general, can prohibit a firm from continuing its allegedly fraudulent practices. Attorney generals can then immediately expose the situation to the public while continue their investigation and gather more information until they are ready to file suit – which can be civil or criminally – against the firm. The act itself is designed to prevent fraud and deceitful practices. Spitzer used the Martin Act as his strongest vehicles to punish the dishonest Wall Street firms.
Of course, no firms are “corrupt” by nature. Matter in fact, most of the Wall Street firms have Code of Ethics and Control systems in place to prevent their employees to practice fraudulently. However, the main problem is that although these policies are well-written in form, not much effort is spent by the firms to actually implement these policies and codes. For example, Merrill Lynch had policies requiring equities analysts to be totally objective, and yet most of its investment bankers acted as salesperson by manipulating reports on stock to attract and keep clients. Most of the fraudulent transactions were able to take place in these sophisticated, well-built Wall Street firms because these firms lacked strong internal control. The high incentive to generate revenue at all costs, the lack of transparency and information flow, and confusing ethical standard all contributed to the interest-conflicting corporate culture that many Wall Street firms have but refuse to acknowledge.
To have a strong internal control, the utmost important component is the “tone at the top” – a solid corporate governance. Strong corporate governance leads to a healthy control environment, which can really define the way a company functions and whether employees act on behalf of the best interest of the shareholders and clients. Aside from setting the mission statements, the top management should emphasize and enforce the values in professional integrity and ethical standard. Firms should set up proper Human Resource (HR) policies and training to make sure they have hired the right people who will do the right things.
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