Grasso Suit Not Cut and Dried Case

New York Atty. Gen. Eliot Spitzer has shown he can make Wall Street cower, but it’s far from certain he’ll succeed in recovering more than $100 million from former New York Stock Exchange Chairman Richard A. Grasso.

Grasso certainly looks like an easy target. The former Big Board chief earned more than $30 million in 2001 and took home a lump-sum payout of $139.5 million before being forced out of his job last fall. Those numbers might make it tough for Grasso to win jurors’ sympathy, particularly since he doesn’t face criminal charges, only the threat of having to give back some of his millions.

But Spitzer has difficulties of his own. For one thing, he filed the Grasso lawsuit under seldom-used provisions of New York’s law governing not-for-profit corporations. Fordham University law professor Jill Fisch says the law was intended for hospitals, colleges and charities rather than for a commercial enterprise such as the NYSE.

Another potential problem is Spitzer’s choice of defendants. Besides Grasso, the suit names only one of the dozens of former NYSE directors -- not the heads of such firms as Ford Motor Co., Merrill Lynch & Co., British Airways and Johnson & Johnson -- who had all voted over the years to make Grasso as richly paid as they were.

In a May 24 news conference and in subsequent interviews, Spitzer has divided the directors into two categories: the misleaders and the misled. Grasso and his close friend Kenneth G. Langone, chairman of the boutique securities firm Invemed Associates Inc., fall into the former category, everyone else into the latter.

The two defendants, with the help of at least one NYSE executive and an outside consultant, kept the rest of the board uninformed or misinformed about Grasso’s pay, Spitzer contends.

But securities lawyer Michael F. Perlis said it would be hard to persuade a jury that an elite cast of corporate titans could be hoodwinked year after year.

Politics may also be an issue: Absent from the defendants’ list is former New York State Comptroller H. Carl McCall, who succeeded Langone in 2003 as head of the NYSE board’s pay-setting Compensation Committee. McCall is a Democratic Party bigwig, leading to speculation that fellow Democrat Spitzer, widely expected to run for governor, cut McCall a break.

Grasso, in an angry opinion-page article in the Wall Street Journal last week, vowed to fight the charges in court. Friends say that after being banished from the only place he ever worked, his reputation in tatters, Grasso feels he has nothing to lose.

And his lawyer is a big gun: Brendan V. Sullivan Jr., who defended Oliver L. North in the Iran-Contra scandal.

Still, in an interview last week, Spitzer seemed to relish the prospect of bringing the case to trial. He believes that his core contention -- that Grasso was egregiously overpaid by the standards of the not-for-profit corporations law -- is a slam dunk.

Spitzer said he also planned to home in on the conflicts of interest that he said compromised the Big Board’s role as a self-regulatory organization charged with keeping brokerages in line. At one point when Langone headed the Compensation Committee, he and four others of the panel’s nine members were subject to NYSE regulation.

The suit cites several examples of Grasso either intervening to help board members with regulatory problems or dragging his feet on enforcement.

After Grasso was put on notice in 2001 that Wall Street analysts were touting stocks they didn’t believe in, Spitzer said Grasso and the NYSE “did absolutely nothing” until Spitzer shamed them into action with his own explosive investigation in the spring of 2002.

Grasso “had been given the responsibility by the SEC of addressing a major fraud,” Spitzer said, “and he did nothing.”

It’s on such regulatory issues that Spitzer will be on his firmest legal ground, according to Fordham’s Fisch. She said the New York statute was meant to protect the public’s interest in not-for-profit institutions: You don’t want the head of the United Way to be grossly overpaid, for example, because it diverts donor funds from the Boy Scouts or hot-lunch programs.

But Grasso’s high pay didn’t hurt the public, unless he pulled his punches as a regulator to keep his salary and perks growing, Fisch said. And she noted that the 54-page lawsuit is long on details about Grasso’s pay packages but short on details of any regulatory shortfalls.

One of the suit’s key arguments is that the directors didn’t realize how increases in Grasso’s annual salary and bonus translated into huge long-term liabilities under various pension, deferred pay and “capital accumulation” provisions in his contracts.

Because the board was unaware of the implications, its votes to approve Grasso’s contracts were invalid, the suit contends.

The complaint focused closely on the board’s vote last Aug. 7 to give Grasso a contract extension through 2006 and award him the $139.5-million payout on the spot. The allegation is that directors were misled into thinking that Grasso was owed the entire amount.

In fact, the suit maintains, $18 million of the total wasn’t legally due to Grasso and the board was under no obligation to release it. The suit says the directors also were misinformed about how much money the Big Board would save by making the payout early rather than during Grasso’s retirement.

Perlis, a former SEC lawyer now with the firm of Stroock & Stroock & Lavan in Century City, said Spitzer would have trouble making that case at trial.

“The deception issue is flat-out silly,” he said. “These are Fortune 500 chairmen. They know compensation.”

According to a report on Grasso’s pay that McCall delivered to Securities and Exchange Commission Chairman William H. Donaldson last September after the scandal erupted, directors over the years were supplied with complete copies of Grasso’s contracts. The legal language was mind-numbing, to be sure, but no more baffling than that of their own employment contracts.

As to the Aug. 7 vote on the contract extension, directors months earlier had received copies of two reports by the law firm of Vedder Price Kaufman & Kammholz, an outside consultant hired to analyze the still-developing proposal for Grasso’s contract extension.

Although Spitzer noted that Vedder Price was cut out of the process after its second report and thus wasn’t able to evaluate the final proposal, its reports contained most of the final numbers and raised serious questions in plain English about the propriety of such a massive and early cash-out.

The huge payout to Grasso would be “rare and inconsistent” with the NYSE’s supposed goal of giving Grasso an incentive to stay on the job, Vedder Price said. It added that the proposal raised “due diligence issues” and would make it hard to recover the funds if Grasso ever resigned without good reason or was fired for cause.

If, in fact, the directors were kept in the dark, what of McCall’s role? He took over from Langone as Compensation Committee head in 2003. It was on his watch that Vedder Price, hired the previous fall at the committee’s insistence, was elbowed aside.

Moreover, on Aug. 7, as the committee abruptly decided to take up the Grasso contract renewal, Frank Z. Ashen, the NYSE’s in-house compensation expert, repeatedly offered to help McCall brief the members and answer their questions on the complex proposal before their vote.

McCall, according to the Spitzer complaint, turned Ashen down.

Ashen has become Spitzer’s star witness. In a settlement, Ashen agreed to cooperate with the investigation. He also acknowledged withholding information from board members and making presentations that he now views as misleading, although he said he didn’t intentionally mislead anyone.

McCall, through a spokesman, declined to comment. Spokespeople for Grasso and Langone didn’t return calls for comment.

Spitzer has denied any political motivation in omitting McCall from the lawsuit. In last week’s interview, he said that in hindsight, McCall “may have been wrong” to expel Ashen from the committee meeting, but “he was not affirmatively deceiving” his fellow directors.

“None of this means he or the other board members ought to be praised,” Spitzer added. “They failed in their duty. They were taken.”