NEWSWEEK has learned that Grasso’s legal strategy involves questioning the motives behind Spitzer’s lawsuit, unveiled today, including whether the high-profile attorney general is using the pay controversy to bolster his stature in the New York State Democratic Party. NEWSWEEK has also learned that Grasso plans to sue the NYSE board that approved his pay dealand that, if successful, he will give whatever money he wins to charity.
Spitzer charges that Grasso violated the state’s not- for- profit law (The NYSE is technically a not-for-profit organization and under New York State law, the compensation of NYSE officials must be “reasonable”). He said Monday he is seeking the return of at least $100 millionfrom the pay package. In his defense,Grasso will likely make one key point to try to depict Spitzer’s case as nothing more than a publicity stunt designed to bolster the career of a highly amibitous politician. His main charge: that Spitzer chose not to file charges against H. Carl McCall, the head of the compensation committee that approved Grasso’s pay deal last year because of McCall’s ties to the state Democratic Party. McCall was the former New York State Comptroller and Spitzer was a key supporter of McCall’s failed gubernatorial bid.
NEWSWEEK has also learned that Kenneth Langone, the NYSE compensation committee’s former chairman who has also been named in Spitzer’s suit, is making plans to sue the NYSE and its board, a move that could mean further embarassment for some of Wall Street’s top chief executives who had approved Grasso’s pay deal. Langone, a key NYSE compensation committee member, has called various NYSE board members to alert them to the possibility of the suit against the exchange. “Ken is telling people that it’s not personal, but that a suit is likely,” said one person with knowledge of the matter.
Neither Grasso nor Langone would comment, but in a statementa spokesman for Langone said the decision to award Grasso his pay deal was “honest, diligent and sound.” The spokesman added the “compensation decisions…were thoroughly researched and, most importantly, supported by 100 percent of the board” and that board members who approved the deal had “access to that same information, beginning, middle and end and that’s why singling people out in this case is so obviously misguided. "
“I am standing up for my convictions and firmly behind those decisions and so if Mr. Spitzer wants to grandstand in the press, he’s doing it on a very shaky soapbox,” the statement continued.
Spitzer announced his case today at a news conference at his offices in lower Manhattan, where he stated that Grasso took about “99 percent of the net income of the New York Stock Exchange,” and 50 percent of the fee income. In his case, Spitzer attacked the compensation formula used to determine Grasso’s pay, and said that Langone and Grasso hid key details of the pay package from board members.
Spitzer also announced two settlements, one with Frank Ashen, who agreed to pay a fine of $1.3 million to settle charges that he played a role in Grasso’s allegedly oversized pay. “Ashen, a top deputy to Grasso, admitted providing incomplete, inaccurate and misleading information in documents to the Board,” Spitzer said in a press release. Mercer Human Resource Consulting, Inc., a consultant asked to prepare a financial analysis of Grasso’s pay deal, has admitted that its report to the Board contained “inaccuracies and omissions.”
Maybe more damaging for Grasso, Spitzer cited Grasso’s “dual role” as regulator and NYSE chairman as a major reason for his high pay package. In a press release, Spitzer said that the “heads of major Wall Street investment banks were also members of the Compensation Committee.” In a press conference he referred to a letter from former Securities and Exchange Committee chairman Harvey Pitt, who in 2002 asked the NYSE and the National Association of Securities Dealers, the market’s two self regulators, to launch an investigation into fraudulent research practices that were prevalent in the markets at the time.
Spitzer said during the press conference that no such investigation took place by the NYSE, but Grasso received around that time one of his biggest paydays ever, more than $30 million.
“As a consequence of these three overarching reasons–too much money, conflicts and misinformation– we have initiated this lawsuit,” Spitzer said.
The Grasso pay deal erupted last year after it was disclosed that he took a $139.5 million retirement and compensation package, a move that led to his resignation in September of 2003. Grasso has maintained that he has done nothing wrong and that he was simply compensated for a job well done. During his tenure, seats of the stock exchange steadily rose in value and more companies listed on the exchange than ever before.
But after the disclosure, Grasso’s pay became a symbol of corporate excess, and the new NYSE chairman, John Reed, ordered an investigation of the deal, and then handed his findings to Spitzer who launched his own investigation under New York State’s not-for-profit laws.
Grasso’s many supporters say that in light of his work for the exchange over the past 35 years, his salary was reasonable, but Spitzer has in recent weeks demanded that Grasso return a chunk of his pay, as much as $50 million.Grasso has refused, and now Spitzer has upped his ante. Grasso recently told NEWSWEEK that he will forgo another $48 million he says the exchange owes him only if he receives an apology from the exchange for destroying his reputation.
Now that Spitzer has unveiled his case, Grasso and Langone are plotting their next move. Grasso plans to show that Spitzer is exaggerating the impact of Grasso compensation on the NYSE’s bottome line. “Even after his pay, we will show that the NYSE still had enormous amounts of income,” said one Grasso insider. During his press conference, Spitzer left out one key point that Grasso is likely to seize upon: Grasso was the first Wall Street regulator to embrace Spitzer’s 2002 probe of Wall Street research, helping Spitzer achieve his much publicized “global settlement” in 2003, which cost Wall Street’s largest firms $1.4 billion.
Meanwhile, the issues concerning Frank Ashen, the exchange’s former head of compensation, seem less starling than Spitzer may be letting on. In a statement released today Ashen seemed to clarify remarks made by Spitzer when he said through his attorney that that “he recognized in hindsight that certain mistakes were made, but at no time did he intentionally provide inaccurate or incomplete information to” the NYSE board.In addition, NEWSWEEK has learned that Spitzer’s office attempted all week to force Ashen to testify against Grasso by agreeing to provide damaging information regrading his former boss, according to people close to the matter. But in the end, Ashen refused. A spokesman for Spitzer’s office declined to comment.
Another key point: how much did Wall Street executives care to know about the terms of the compensation deal? Several CEOs who served on the compensation committee have said that they would have paid Grasso whatever he wanted because of his value to the exchange. Grasso will argue that even when NYSE board members heard about the details of his pay package last year, they still unanimously approved the deal, including McCall who served as the compensation chief last year when Grasso received the money.
