Stock Market’s Ex-CEO Is Sued, Accused of Unlawful Pay Grab
New York Atty. Gen. Eliot Spitzer sued former New York Stock Exchange chief Richard Grasso on Monday, alleging that the man once celebrated as the public face of Wall Street used deception and intimidation to take home at least $100 million more in pay than he was entitled to.
The lawsuit portrays Grasso as stockpiling the NYSE’s board of directors with his allies, then misleading them about the extent of his compensation.
Grasso, who became chairman and chief executive of the world’s largest stock exchange in 1995, was forced out in September after it was revealed that a month earlier he had been paid $139.5 million in bonuses and retirement benefits accumulated almost entirely since 1999, and that he was owed $48 million more.
The disclosure capped a public outcry over executive pay levels and sparked added furor because the NYSE, as a regulator of most of the nation’s biggest companies, had been cracking down on similar perceived abuses in corporate America.
The 57-year-old Grasso, who has been defiant in the face of criticism over his compensation, said in a statement Monday that he expected to receive “complete vindication” in court and that he always had acted “in the best interests of the exchange.”
Although the broad parameters of Grasso’s pay package have been known since September, Spitzer revealed new details about the alleged lengths to which Grasso went to maintain power and reward himself:
* On a 1-to-10 performance scale used to determine compensation, Grasso at one point assigned himself a 13, Spitzer said.
* With Grasso’s knowledge, an NYSE official gave the board misleading information about Grasso’s bonuses, according to the suit filed in state court.
The official, former NYSE human resources chief Frank Ashen, tallied Grasso’s total pay on an internal NYSE worksheet but omitted data on one bonus plan when submitting the report for board approval, the suit said.
Ashen settled Monday with Spitzer by agreeing to return $1.3 million of his own pay and to cooperate in the Grasso case.
* The NYSE faced inherent conflicts of interest in setting Grasso’s pay because he had “sole authority” over which directors sat on the board’s compensation committee, Spitzer said.
* After one NYSE board member questioned Grasso’s pay in a private conversation with Ashen in 2000, Grasso quickly learned of the dissent and confronted the director, who ultimately reversed course and voted for that year’s compensation package, the suit said.
* When a law firm hired to advise the board’s compensation committee questioned Grasso’s pay, it was simply cut out of the process, Spitzer said.
* In his last three full years, Grasso’s $130.3-million pay package virtually equaled the NYSE’s total profit in that period, and was more than half of the fee increases the NYSE imposed on its member brokerages during that time.
Grasso’s ouster over his compensation marked a chapter that few on Wall Street could have imagined, given the power he had wielded and the sparkling public persona he achieved.
A Queens, N.Y., native who never finished college, Grasso spent his entire career at the NYSE, rising to the top against what insiders said were long odds.
He achieved his greatest acclaim in the aftermath of the Sept. 11, 2001, terrorist attacks, when he guided the quick reopening of the exchange -- located blocks from ground zero -- and gave voice to the city’s steely determination to recover.
But Spitzer painted a different picture of Grasso, saying that his compensation reflected “the unabashed pursuit of personal gain.”
At the core of the suit is Spitzer’s contention that the NYSE, despite its image as the citadel of capitalism, is legally a not-for-profit corporation that under New York law cannot pay employees exorbitant sums.
“You can’t pay the head of a nonprofit corporation that much money,” Spitzer said at a news conference. “It’s not reasonable. It’s not right.”
Spitzer said he would seek to have “well over $100 million” returned by Grasso.
The suit also named Kenneth Langone, a close friend of Grasso who headed the NYSE’s compensation committee from mid-1999 to mid-2003. The suit alleges that Langone misled colleagues about Grasso’s earnings.
The exchange itself is named, although Spitzer attributed that to legal requirements and praised the NYSE’s new management for implementing governance reforms.
Grasso, in his statement Monday, said he was “disappointed that New York’s attorney general has chosen to intervene in what amounts to a commercial dispute between my former employer and me.”
Langone attacked Spitzer, saying: “These were honest, diligent and sound compensation decisions that were thoroughly researched and, most importantly, supported by 100% of the board,” he said. “If Mr. Spitzer wants to grandstand in the press, he’s doing it on a very shaky soapbox.”
The NYSE said it was “supportive of Atty. Gen. Spitzer’s efforts in this matter. As a named party, it would be inappropriate to comment further.”
Spitzer criticized the NYSE’s previous board, which included the heads of Wall Street’s biggest brokerages, for inadequate oversight. But he said he didn’t take action against the full board because it wasn’t shown all of Grasso’s pay data.
Securities attorneys were split on whether Grasso had broken the law and whether he could be forced to return any money.
John M. O’Connor, a securities lawyer with Anderson Kill & Olick in New York, said that although Grasso’s compensation appeared excessive by not-for-profit standards, Spitzer would be challenged “to show what an appropriate compensation would have been -- to show how much in excess his compensation was.”
The underlying rationale of the New York law governing not-for-profit organizations is that, unlike profit-making corporations, they deserve a special status -- including tax breaks -- because they are thought to be doing something in the public interest, O’Connor said.
Jamie Wareham, a Washington-based securities law partner with Paul Hastings Janofsky & Walker, said Spitzer seemed to be “grandstanding.” New York state has known for years, or should have known, what Grasso was paid, Wareham said, yet it was raising the issue only now.
In the only interview he has given since he was forced out of his job, Grasso told Newsweek this month that he would drop his claim on the $48 million in deferred pay he said the NYSE still owed him -- if the exchange would apologize for “destroying my reputation.”
“If I give back a dime, that’s an admission of guilt. I can’t do that,” Grasso said. “But if they say I’m an honorable man and I did nothing wrong, it’s the end of the issue. If not, let’s go to war.”
An incident that particularly stuck in the former NYSE chief’s craw, according to the interview, was when his daughter told him that in one of her college classes, Grasso’s pay was used as an example of Wall Street greed.
“That’s when I almost lost it,” he said.