N.Y., SEC to Review Grasso Pay

State and federal regulators said Thursday that they would investigate Richard Grasso’s $188-million compensation package and decide whether to sue the former New York Stock Exchange chief.

New York Atty. Gen. Eliot Spitzer and the Securities and Exchange Commission, responding to an NYSE request for help, said they would study the circumstances surrounding Grasso’s outsize pay. The goal will be to determine whether legal action is warranted against Grasso, or the former NYSE directors who awarded him the compensation, to recoup a large portion of the money.

The current NYSE board gave Spitzer and the SEC copies of an independent report commissioned by John S. Reed, the exchange’s interim chairman. In letters to Spitzer and the SEC, the NYSE said the report showed that “serious damage has been inflicted on the exchange by [Grasso’s] unreasonable compensation.”

Though the exchange clearly is trying to pressure Grasso into negotiations, it also is trying to score public relations points, said John Coffee, a Columbia University law professor.

“To a certain extent, this is not a matter of money,” Coffee said. “Rather, this is about reestablishing [the NYSE’s] credibility by showing you’ll go after the people who looted the exchange.”

Grasso’s lawyer did not return a call seeking comment.

The NYSE revealed in late August that it had paid Grasso almost $140 million in deferred compensation and other benefits, a huge sum compared with the pay of other stock market chiefs. Two weeks later, the Big Board said he was owed an additional $48 million, infuriating even supporters, who questioned why his full compensation wasn’t revealed sooner.

The twin disclosures led to Grasso’s departure in September, touching off a bigger furor about how the exchange is run and whether it acts in the best interests of investors.

Experts said it was likely that Spitzer would take the lead in investigating the Grasso compensation package, in part because he has authority under New York state law to bring charges against not-for-profit corporations such as the NYSE.

Spitzer would not necessarily have to prove wrongdoing by Grasso, Coffee said.

He would simply have to show that his pay was unreasonable in comparison with the Big Board’s revenue and earnings, Coffee said.

For example, Grasso’s compensation in some years exceeded the NYSE’s net income and came close to matching its revenue and came even as the NYSE charged its trading firms a special levy to cover technology upgrades. It could be argued, Coffee said, that the money paid to Grasso drained resources from other needs.

Experts said Spitzer could file suit against the former directors if they had failed to follow proper procedures or acted capriciously in setting his pay.

As board chairman and chief executive, Grasso also had a duty to ensure that his pay was reasonable, and legal action could be taken against him on those grounds, said Allan Grauberd, a partner at Jenkens & Gilchrist in New York.

“Grasso’s duty was to ask for reasonable compensation,” Grauberd said.

On Thursday, the NYSE named Richard Ketchum to the new position of chief regulatory officer, responsible for monitoring firms that trade on the NYSE.

The Big Board also said it retained an outside lawyer to review the job the exchange had done in regulating those firms. The NYSE has been criticized for allegedly failing to crack down hard enough on firms that violate trading and other rules.

Separately, the Nasdaq Stock Market, seeking to gain from the NYSE turmoil, has asked several large companies that trade on the NYSE to list their shares on Nasdaq as well, according to a report in the Wall Street Journal. A Nasdaq spokeswoman declined to comment.

Spitzer has had a mixed relationship with Grasso, who mediated a dispute in 2002 between Spitzer and the SEC that kept the historic investigations into stock analysts from derailing.

But Spitzer later lashed out at Grasso for nominating Sanford Weill, then the chief of Citigroup Inc., which paid the largest amount in the analyst settlement, to the NYSE as a representative of investors.