N.Y. state sues stock exchange figures

Ex-chairman's pay deal of $187.5 million for year is at heart of controversy


NEW YORK - New York state Attorney General Eliot Spitzer filed a civil lawsuit yesterday against the former chief executive of the New York Stock Exchange, Richard A. Grasso, contending that the $187.5 million pay package awarded by the Big Board was "wholly inappropriate and illegal."

In addition to Grasso, who was forced to step down as head of the exchange last September when details of his compensation package were disclosed, Spitzer sued Kenneth G. Langone, the former chairman of the New York Stock Exchange compensation committee, and the exchange itself.

All of the parties were accused of violations of New York state's Not-for-Profit Corporation Law.

Grasso's lawyer, Brendan Sullivan Jr., declined to comment.

The controversy surrounding Grasso's compensation surfaced last Aug. 27, when the exchange announced that Grasso had agreed to a new contract, extending his commitment to the Big Board until May 31, 2007, from 2005.

In the contract, it was disclosed that he received a $139.5 million payment "to facilitate personal financial and estate planning."

Grasso says the exchange owes him an additional amount of about $48 million. He has said that he would be willing to forgo that payment in exchange for an apology.

In the lawsuit, filed in state Supreme Court in Manhattan, Spitzer did not specify how much of Grasso's pay he intends to recover.

But at a news conference in Lower Manhattan yesterday, he said he would seek "well over" $100 million.

The lawsuit asks a state court judge to rescind the pay package and to determine a "reasonable" level of compensation for Grasso.

"This case demonstrates everything that can go wrong in setting executive compensation," Spitzer said. "The lack of proper information, the stifling of internal debate, the failure of board members to conduct proper inquiry and the unabashed pursuit of personal gain resulted in a wholly inappropriate and illegal compensation package."

Under the terms of New York's Not-for-Profit-Corporation Law, the attorney general is authorized to start an action against a director or officer of an organization "to compel the defendant to account for his official conduct" with respect to "the neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets."

Additionally, the law authorizes the attorney general to seek recovery of what it calls "unreasonable" compensation.

4-month investigation

The complaint completes a four-month investigation carried out by Spitzer and the Securities and Exchange Commission. The SEC did not join with Spitzer in the lawsuit because it has no jurisdiction in enforcing New York's not-for-profit law, Spitzer said.

Ray Pellecchia, an NYSE spokesman, responded to the lawsuit by saying, "We are supportive of Attorney General Spitzer's efforts in this matter." Earlier this year, the NYSE asked Grasso to return $120 million of his compensation. Grasso refused.

Spitzer also announced yesterday that he had reached settlements with an NYSE executive and an independent consultant in the Grasso matter.

The executive, Frank Z. Ashen, who was the Big Board's internal expert on compensation, and Mercer Human Resource Consulting Inc., which was asked to prepare a financial analysis of Grasso's proposed $187.5 million payment, both admitted providing information to the New York Stock Exchange board that Spitzer claims was "inaccurate and incomplete."

Mercer admitted that its report on Grasso's final pay package, ultimately approved by the board in August 2003, did not adhere to the exchange's typical methods for determining executive pay.

Return of money

Under the settlement, Ashen, a top aide to Grasso, will return $1.3 million to the exchange, and Mercer will return the fees it charged the NYSE in 2003, totaling $440,275, Spitzer said.

Ashen admitted that figures on Grasso's deferred payments were not included in worksheets given to board directors during their compensation deliberations. But he did not deliberately mislead the board, said his attorney, Bruce Yannett.

The lawsuit charges that Langone was aware of the "inaccurate and incomplete" information that was presented to the board. At the news conference, Spitzer said he is "looking to get" $18 million from Langone.

According to former directors who were deposed in the investigation, the thrust of the questions focused on two main themes: the nature of their relationship with Grasso, both personal and professional, and the extent to which they were kept in the dark about how Grasso's yearly bonuses were ballooning his retirement account.

Directors were also asked to explain even the most oblique references to Grasso found in their e-mail messages; how often they talked with him on the telephone; and whether they occasionally dined with him.

The content of those depositions, Spitzer said, led to three conclusions about how much Grasso got paid and how he came about receiving it.

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