Spitzer, Ethics Crusader, Now Probed Over Own Conduct (Update3)

March 11 (Bloomberg) -- New York Governor Eliot Spitzer, who spent the last nine years pursuing malfeasance in government and on Wall Street, now finds himself a target following reports linking him to a prostitution ring.

After a public apology yesterday for behavior ``that violated the obligations to my family and that violates my or any sense of right or wrong,'' Spitzer faces calls from friends and adversaries for his resignation less than 18 months after winning election with the biggest majority in state history.

``It's very unlikely he can survive,'' said Lee Miringoff, director of the Marist College Institute of Public Opinion in Poughkeepsie, New York. ``Everything is made more problematic because it's an issue of integrity, which had been his strong suit.''

On Wall Street, where Spitzer made his reputation as state attorney general with battles against firms including American International Group Inc. and Citigroup Inc., ``I can only tell you that people are somewhat gleeful,'' said Chuck Gabriel, whose Washington firm, Capital Alpha Partners, provides political analysis to institutional investors. ``This is a guy who had Wall Street under his thumb, and now he's fallen into the same kind of trap as those who suffered under his hand.''

IRS Probe

The New York Times reported today that the investigation into Spitzer's behavior was triggered by a routine Internal Revenue Service check.

IRS investigators examining suspicious financial transactions reported to them by banks spotted several unusual movements of cash linked to the governor of New York, the newspaper said.

Spitzer appeared to be trying to conceal the source and destination of thousands of dollars, which went to the accounts of what seemed to be shell companies, the newspaper reported, citing unidentified officials with knowledge of the matter.

Messages left today at Spitzer's office by Bloomberg News outside regular business hours weren't answered. Calls and e- mails sent today to the Manhattan U.S. Attorney General's office at the same time didn't get a response.

The Times reported on its Web site yesterday that Spitzer, a Democrat, was caught on a federal wiretap planning to meet a prostitute in Washington after arranging for her to travel from New York. A person briefed on the federal investigation said Spitzer was the individual identified in an affidavit as ``Client 9'' who met with a woman in the Mayflower Hotel in Washington, the Times reported.

High Standards

Client 9 paid $4,300 for an appointment that began on Feb. 13 and ended at 12:02 a.m. the next day, according to the affidavit.

``It goes beyond anything I've ever seen,'' said former three-term U.S. Senator Alfonse D'Amato, 70, a Republican. ``He had enormous potential. He was outstanding as attorney general but if you're the crusader, you're going to be held to the highest standards, and so I think he has to leave, and soon.''

Rebekah Carmichael, a spokeswoman for Manhattan U.S. Attorney Michael Garcia, whose office is prosecuting the prostitution case, declined to comment when asked if Spitzer was under investigation for links to the ring, known as the ``Emperors Club.''

At his 1-minute, 18-second Manhattan briefing with his wife, Silda, by his side, Spitzer, 48, didn't specify the behavior by which he ``disappointed and failed to live up to the standard that I expect of myself.'' The governor has three daughters.

Public Schedule

Spitzer said politics was more ``about ideas, the public good and doing what is best'' than about individuals. He promised he would report back ``in short order.''

The governor's office said Spitzer would be in New York City today, with no public activities scheduled.

``It's another instance in which a very smart, very powerful man brings himself down through his own hubris,'' said William Cunningham, a political consultant who worked on the senior staffs of former Democratic New York Governors Hugh Carey and Mario Cuomo. ``We have seen it with Richard Nixon, we've seen it with Bill Clinton, very successful people who think they have their own set of rules, and self-inflict their own wounds.''

Washington Testimony

The encounter by ``Client 9'' with the prostitute occurred while Spitzer was in Washington to testify before a House subcommittee on the higher costs of government debt caused by the impact of the subprime crisis on bond insurers.

That testimony held the prospect of helping to reverse a yearlong slide in the governor's approval rating, political analysts said.

The governor's popularity plunged last year after disclosures that his staff had directed state police to compile records on Republican Senate Majority Leader Joseph Bruno's use of state-owned aircraft. In November, the governor withdrew his proposal to permit illegal immigrants to obtain drivers licenses amid widespread opposition.

H. Carl McCall, a former state comptroller and gubernatorial candidate in 2002, said Spitzer ``will have to decide whether under these circumstances he can provide the leadership to carry forward his priorities.''

Hevesi Resignation

Spitzer played a role in forcing McCall's successor as state comptroller, Alan Hevesi, to resign amid disclosures that Hevesi had used his state-paid driver as a chauffeur for his disabled wife, at a cost to the state of more than $170,000.

He gained nationwide attention after investigations by his state attorney general's office exposed conflicts of interest between Wall Street analysts, who misled investors on the value of Internet stocks to win underwriting assignments during the dot-com boom in the 1990s. Securities firms eventually paid $1.4 billion to settle claims from the probe.

Spitzer then investigated the money management industry in 2003, showing how hedge funds and mutual funds were given preferential treatment in the timing of their trades by brokers. Funds and brokerage firms paid more than $5 billion to resolve the federal and state investigations.

Should Spitzer step down, Lieutenant Governor David Paterson would finish the governor's term, and Bruno would be next in line.

``The important thing for the people of New York state is that people in office do the right thing,'' Bruno said in a statement.

`Shocked' Democrats

Hank Sheinkopf, the architect of Spitzer's upset victory election to state attorney general in 1998, said ``it's not likely'' the governor would survive.

``Democrats are shocked,'' Sheinkopf said. ``The state faces major economic problems and probably soon-to-be-governor Lieutenant Governor David Paterson will have to rise to the occasion.''

State Assembly Speaker Sheldon Silver, a Manhattan Democrat, issued a two-sentence statement yesterday, saying, ``The allegations against the governor are before the public. I have nothing to add at this time.''

Joseph Mercurio, a New York political consultant who has worked for both Democrats and Republicans, said politicians have survived these kinds of scandals before.

``This isn't malfeasance in office, he wasn't misusing public funds, it's a matter between him and his family,'' Mercurio said. ``But his damage control is going to have to be handled very delicately.''

Political Stability

Spitzer's removal, said D'Amato, would bring ``some political stability back to the state because Paterson's a guy who could govern in a much less partisan way. He knows how to deal with people to get things done.''

The scandal will make it more difficult to conduct the state's business, several lawmakers and political scientists said. A budget is due for the fiscal year starting April 1. The state's schools need improvement, and its health costs continue to rise. As the economy slows and revenue decreases, the political environment will become more challenging, said Hunter College political science professor Kenneth Sherrill.

``Until the governor's future is determined, the state's finances will be limbo or worse,'' Sherrill said in a telephone interview. ``The New York budget process is in flames.'' http://www.bloomberg.com/apps/news?pid=20601087&sid=ahsUyvhrmM6I&refer=home