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Understanding the Market » Blog Archive » Why Eliot Spitzer was investigated
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Why Eliot Spitzer was investigated


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Eliot Spitzer, the governor of the state of New York (and former New York State Attorney General)

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, resigned on March 13 as a result of his involvement with an expensive prostitution service. Many commentators noted the hypocrisy of a former prosecutor

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, who investigated prostitution services, losing his job as a result of patronizing such a service. But the reason that the governor was investigated was not because he was found to be visiting prostitutes, but because of the way that he paid for the service.

There are laws in the U.S. that require the reporting of cash withdrawals and deposits of $10,000 or more, designed to discover those who might be earning money from illegal activities. These forms are not very complicated, and pose modest costs for businesses and ordinary citizens who need cash for legitimate reasons. But every law provokes a reaction; in this case, clever people would make transactions of somewhat less than $10

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,000. So a new crime was created, called “structuring” (see here), which approximately implies that it is also illegal to make repeated transactions less than $10,000 designed to avoid the $10,000 rule (note: I am not a tax attorney and none of the above is intended to represent legal advice; I am merely a market analyst trying to understand the situation and explain it to others).

As a result of the structuring rule, banks are required to report wire transfers that might appear to be “structured” transactions. Unfortunately for ex-Governor Spitzer, he made repeated wire transfers to pay for the services he was purchasing to a company that was somewhat suspicious. The company did not appear to have an office at its official address. Investigators wondered why a governor would be making payments to a dubious corporation…could he be paying off a blackmailer?

By monitoring the governor’s telephone calls and text messages, investigators learned exactly what the governor was buying with his payments

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, and the investigation shifted to prosecuting the providers of the prostitution service; ultimately the governor was probably only Client-9 in a complicated case against the four people who ran the service.

The governor was ultimately forced to resign as a consequence of his hypocrisy, having prosecuted the businesses of which he was a customer. But if he had chosen a more moderately priced service, and not paid with money transfers, he would likely still be the governor.

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