Spitzer didn't help his case at the Institutional Investor dinner. He surprised himself by accepting the invitation and surprised his wife, Silda Wall, by delivering the speech he had drafted. After the e-mail crack, he went on the offensive. He told the crowd that the awards—for the magazine's 31st annual All America Research Team—were essentially a sham and that, on the basis of his research, virtually none of the honorees merited praise. Several attendees muttered expletives and walked out.

When Spitzer gave the order to subpoena every relevant e-mail he could get his hands on, he had no idea he would get the smoking guns that materialized. Merrill Lynch complied promptly, perhaps unaware of the documents' incriminating nature. Over six weeks in March and April, the investment bank sent 30 big boxes of e-mail, snapshots from the hard drives of Internet-company analyst Henry Blodget and his team.

It was a new experience for Spitzer, who had never tried to build a case from an unsorted, unedited stack of e-mail. For more than a month, Dinallo, who runs the investor-protection arm of the office, and a few associates hunkered down, reading the messages at work, over lunch, in bed at home. An empty office became the war room, a place where the staff could read and catalog what turned out to be 94,439 pages of e-mail. "I read a large portion of them," says Dinallo, a bright, energetic lawyer whose off-hour passions are chess and vintage comics. "You're getting these conversations in real time, learning how they talk and think."

The investigation began on a shoestring in June 2001, when the attorney general's office, inspired in part by a Wall Street Journal article, issued a subpoena to Merrill asking for documents related to GoTo.com and another Internet company, InfoSpace. Spitzer dusted off the Martin Act, a 1921 New York statute that allows the attorney general's office to launch broad investigations of securities companies. "Martin," Spitzer concedes, "is generous to prosecutors." His interest picked up the following month when he learned that Merrill Lynch had settled promptly and magnanimously with a New York City pediatrician who charged that his $1.2 million portfolio had been nearly wiped out by Blodget's allegedly tainted boosterism for tech stocks, including InfoSpace. The $400,000 settlement energized Spitzer. "I looked at that," he says, "and thought, There has got to be something there."

It was the 30 boxes of e-mail that began arriving in March that made the case. In early spring Spitzer confronted Merrill with the evidence. Merrill complained that they had been taken out of context but appeared willing to settle. What Merrill didn't want was having everything made public. That's where it underestimated Spitzer's resolve. He held out for disclosure and on April 8 filed an investigative action against Merrill. That day he held a press conference and released the most egregious of the e-mail.

They became instant classics. A Merrill research report from Dec. 21, 2000, for example, called an Internet company, LifeMinders, "an attractive investment." But earlier that month, a Blodget e-mail had said, "I can't believe what a pos [piece of s___] that thing is." Spitzer has another favorite—a Blodget missive, now known in the office as the "smoking-gun" document, that says if his team doesn't get any guidance from above, "we are going to just start calling the stocks ... like we see them, no matter what the ancillary business consequences are." Says Spitzer: "You had to love it. Blodget made it clear he genuinely didn't believe his own ratings."

With the e-mail public, Merrill felt its reputation was beginning to suffer. It finally agreed to settle, without admitting wrongdoing, on the condition that there be a broad agreement precluding similar suits by other zealous state attorneys general. The deal was pounded out. In the end, Spitzer says, he didn't negotiate the fine. He called Merrill Lynch's lawyers and recalls saying, "It's $100 million. It won't kill you. I want this settled tonight."

Merrill agreed to pay the fine, apologize and reform the way it paid its analysts. The public applauded the deal, though Spitzer was criticized. Some felt he was too lenient with Merrill, which can easily afford $100 million (average profit over the past three years: $2.35 billion). Moreover, no one went to jail. Others say he was too harsh, meddling in an area in which he had no expertise or clear jurisdiction. Spitzer agrees that the Securities and Exchange Commission (SEC) was ideally placed to pursue the case; when it didn't, he stepped in. However, he says, he never sought crippling penalties. "I began this with the premise that we did not want to challenge the financial viability of Merrill or any of the others." No perp walks necessary.

The first shot had been fired. But Spitzer was not done. His office led an effort to subpoena e-mail from a dozen other investment banks. The cases were later parceled out for several other states to pursue: California got Deutsche Bank, for example; Massachusetts got CSFB. The sec jumped in after the Merrill settlement, and Spitzer and the sec's director of enforcement, Stephen Cutler, began working on a comprehensive deal to settle all 12 cases at once.

When Spitzer meets in his office to discuss big cases like these, he sits at the head of the table, ramrod stiff. His feet don't tap; his fingers don't twitch. The scene is like trick photography. Everyone else is in motion—shifting, wiggling, scratching—while Spitzer is still. But when he needs to, he can crank up the passion. When he felt negotiations with the 12 banks had dragged on too long, he decided to play tough. He instructed the top lawyers of five of the major banks to come to his office. When they arrived, he lit into them. (One CEO was also present, Morgan Stanley's Philip Purcell.) "Spitzer was harsh, irate, yelling at times," one of the lawyers told TIME. Spitzer said he was fed up with their haggling, that they should be ashamed of what they had done to investors, that they were acting "like children in a sand box." He told them to settle at once or he would start bringing cases. At the end, he said, "Any questions?" The group was silent.

1 | 2 | 3 | 4 | Next >>

Get the Magazine — Try 4 Issues Free!

Disconnected: Deceit and Betrayal at WorldCom By Lynne W. Jeter Price: $19.96

	PHOTO ESSAY People Who Mattered in 2002 A general, a bishop, a bride and a groom: just a few of the other men and women who made news this year NOTEBOOK In Memoriam From a baseball legend to the madame of manners, TIME pays tribute to those who died this year ENTERTAINMENT Best & Worst 2002 TIME picks the best and worst movies, books, music and more BUSINESS 2002 Global Influentials TIME profiles 15 up-and-coming business executives around the globe