In a twist of irony, Eliot Spitzer, the man who prosecuted some of Wall Street's darkest scandals, found himself embroiled in a scandal of his own making on March 10, 2008. As attorney general for New York City, Spitzer had uncovered some of corporate America's dirtiest secrets, but now the hunter had become the hunted. His involvement with an alleged call-girl ring shattered what had once been a brilliant career and untarnished image.

The details of his fall made headlines, but few know the details of his rise to power and his valiant crusade against Wall Street corruption. In this article we will detail Spitzer's climb to become one of the most powerful and feared men on Wall Street.

Makings of a Crusader
Eliot Laurence Spitzer was born June 10, 1959 to an affluent New York family. He was raised in the Bronx, and at school his competitive nature began to show. He was a top student and athlete. He scored 1590 on the SAT exam, and graduated from Princeton in 1981 with a Bachelor of Arts degree. He received a perfect score on the LSAT entrance exam to law school, and earned a Juris Doctorate from HarvardLawSchool in 1984.

After graduating from college, Spitzer clerked for a judge in the United States District Court before serving as an assistant district attorney in Manhattan from 1986 to 1992. From 1992 to 1994, he worked at the law firm Skadden, Arps, Slate, Meagher & Flom LLP, but found private practice unfulfilling.

Attorney General of New York
In 1994, the 35-year-old Spitzer stepped out of private practice and ran for attorney general in New York. Although backed by his family's considerable wealth, he came in fourth in the four-person race. Undaunted, Spitzer ran again in 1998, once again financed by his family. This time, he won the election after beating out incumbent Dennis Vacco by less than 1% of the vote. After four successful years in office, Spitzer was reelected in 2002 in a landslide victory by capturing more than two-thirds of the vote.

During his time as attorney general, Spitzer was a man on a mission. His prosecutions against Wall Street criminals and others catapulted him to the pinnacle of media prominence. Time Magazine named him "Crusader of the Year" in 2002 and the tabloids dubbed him "Eliot Ness" or the "Sheriff of Wall Street" for his moves to clean up corporate corruption and organized crime. It was his time spent at the attorney general's office that Spitzer had the greatest impact on Wall Street. Let's now examine some of the biggest scandals he helped break.

Research Report Scandal
Spitzer began to make his mark on the financial services world in 2002, when he reached a settlement with 10 major investment banks and brokerage houses for their roles in inflating stock prices.

The investigation started with Merrill Lynch and eventually expanded to a dozen other big-name Wall Street firms. The charge was that these firms issued positive research reports on various stocks despite weak underlying fundamentals. They then encouraged their brokers to use the false research to promote the stocks. These efforts created artificial demand for the stocks, pumping up the prices and generating profits for the firms that sold them - the same firms who were issuing the reports in the first place. (To learn more about pumps and dumps, read The Chinese Wall Protects Investors Against Conflicts Of Interest and The Rise Of The Modern Investment Bank.)

Merrill Lynch handed over 30 boxes full of printed emails. Spitzer and his team then combed through them for evidence that the bank was pumping up bad companies. One famous example came when a Merrill Lynch research report from December 21, 2000, called internet company LifeMinders, "an attractive investment". Earlier that month, Merrill Analyst Henry Blodget had said in an email he couldn't believe what a horrible investment the stock was - though he used more colorful language.

At the conclusion of Spitzer's investigation, Merrill Lynch and the other firms paid $1.4 billion in fines, without admitting wrongdoing, and new rules were passed to break the ties between investment banking and stock analyst compensation.

Like everything else on Wall Street, there are varying opinions regarding the effectiveness of the investigation into the research scandal. Critics argue that, despite the fines, Wall Street research still depends on sales to earn money, so this research will always be biased in favor of efforts that will support sales and profitability. (For a detailed exploration, read Why There Are Few Sell Ratings On Wall Street.)

Late-Day Trading Scandal
Spitzer was back in the headlines in 2003, when he prosecuted a host of prominent mutual fund families for permitting late trading and market timing in their funds. (For a detailed breakdown, read Canary Capital Partners: Anatomy Of A Scandal.)

Many of the biggest names in the business were indicted for cheating their own shareholders by permitting hedge funds and other favored clients to buy and sell shares after the 4pm close of the trading day. Unlike after-hours trading of stocks where the price still fluctuates relative to demand and supply, in late-day trading, the price of the mutual fund (its net asset value) remains fixed, even though material information about the fund's holdings may be released after market close. This allowed the well-heeled funds to profit at the expense of regular investors. (To learn more about the problem, read What is late-day trading?)

Insurance Commission Scandal
In 2004, Spitzer turned his attention to the insurance industry. His investigation put a spotlight on the practice of "contingent commissions". Under this practice, insurance brokers sold policies based strictly on the amount of compensation they stood to earn for making the sale rather than on whether the product was a good fit for their client's needs.

More profitable policies were sold over less profitable ones even when the less profitable policies would have been more appropriate for the buyer. This practice primarily targeted business clients, not individuals. As a result of the investigation, the industry changed its practices, significantly reducing the number and types of policies sold on contingent commission basis. (For more reading the murky ethical waters of the financial world, see Understanding Dishonest Broker Tactics and The Biggest Stock Scams Of All Time.)

Other Contributions
Spitzer also made a mark in a series of cases involving organized crime, consumer affairs, the environment and public safety. This included a lengthy investigation into price fixing by computer chip manufacturers, which resulted in nearly $1 billion in fines.

Beyond Wall Street
While he rose to fame by tracking down white-collar criminals, Spitzer's high-profile role in financial market history was merely a stepping stone for greater political ambitions. Using his well-known public persona as a catalyst, Spitzer launched a bid for governor of New York. He was elected in November of 2006 and sworn in as New York's 54th governor on January 1, 2007.

Until news of Spitzer's own scandal broke and he resigned from office, there had been rumors and speculation he might run for president of the United States. Those rumors have since died, but the scandals Spitzer prosecuted and the rules he helped create to protect regular investors from corporate greed will live on.