Updated from May 24
The war of words between Eliot Spitzer and Richard Grasso sharpened Tuesday with the deposed
New York Stock Exchange
chairman lambasting the suit to overturn his huge pay package in a
Wall Street Journal
Grasso, who was sued along with the exchange and former director Kenneth Langone on Monday by Spitzer's office, denied allegations he lied to the NYSE board to inflate his pay package and suggests politics -- not principles of law -- informed the New York attorney general's suit. He specifically points to the omission of the board's former compensation chief, onetime New York Comptroller Carl McCall, from the complaint as evidence Spitzer's motives are tainted.
"Mr. Spitzer's decision to sue me and not Mr. McCall, who signed the new contract three weeks later, or the powerful CEOs who voted for my compensation year after year, makes clear that Mr. Spitzer is running for governor, and running hard," Grasso wrote. "He badly needs the support of Mr. McCall, and the others who made the decisions now under attack."
In announcing the suit, which will seek to disgorge more than $100 million of pay, Spitzer on Monday said Grasso received too much as the head of a not-for-profit corporation and criticized the "rigged compensation formula" the NYSE relied on in approving the hefty pay package.
Spitzer also disclosed what could be important ammunition in the suit -- a $1.3 million settlement with Grasso deputy Frank Z. Ashen, who admitted to providing "incomplete, inaccurate and misleading" information to the board when it was setting his boss' pay. A compensation consultant to the board, Mercer Human Resources Consulting, also settled with the state and admitted that its financial analysis of the pay package contained "inaccuracies and omissions." Mercer agreed to forfeit the $440,000 in fees it earned in 2003.
Specifically, the lawsuit alleges the board was either misled or given incomplete information about $18 million in bonuses awarded to Grasso and another $30 million in benefits that Mercer mischaracterized as having already vested.
Grasso said such a claim is absurd.
"It defies credibility that some of these same directors now claim that they didn't understand the extent of my retirement benefits," he wrote in Tuesday's editorial. "These benefits were clearly outlined in the three contracts under which my compensation was awarded. The Sergeant Schultz defense -- 'I know nothing!' -- sounds particularly silly coming from men and women who were themselves paid hundreds of millions of dollars over the same period while running multibillion-dollar companies."
Spitzer, speaking at a Monday afternoon news conference, said his office wants to force Grasso to return at least $100 million of the money he walked away with when he was forced to resign last September. Grasso's total pay package was $187 million, but he agreed to not to take another $48 million at time of his resignation.
"New York not-for-profit law requires that compensation for executives be 'reasonable' and 'commensurate with services provided,'" Spitzer said. "In this case, however, the compensation far exceeded what would have been permitted by that standard. Indeed, the amount expended by the NYSE for Grasso's compensation and benefits for 1999 through 2001 nearly equaled the NYSE's total net income for those years."
Grasso said his accomplishments speak for themselves.
" The value of a membership seat nearly tripled during my tenure as chairman, soaring to more than $2 million from $700,000; the income to seat owners leasing their seats to others likewise jumped to $300,000 from $100,000," he wrote. "Under my leadership, the NYSE significantly increased its market share. It nearly doubled the number of listed companies, and the great majority of the near-500 non-U.S. companies now on the NYSE were listed during my tenure."
"Reasonable people can disagree about what an executive should be paid, but the directors who evaluated my performance were well aware of the market for executive compensation on Wall Street, because that is where many of them worked and earned their own substantial income. For all the charts and handouts at his press conference, Mr. Spitzer cited no evidence that I misled the Board or hurt the NYSE. It didn't happen," Grasso wrote.
The lawsuit, which had been in the works for weeks, also names the NYSE and former board member Kenneth Langone as defendants. Langone, the former chairman of the NYSE's compensation committee, is a personal friend of Grasso. The lawsuit alleges that Langone, an investment banker and
founder, misled his fellow Big Board directors about some aspects of the pay package.
Spitzer, however, did not name any other former directors who had sat on the NYSE's 27-member board as defendants in the litigation. Spitzer said that while the other board members could have been more vigilant, there was no basis for holding them individually accountable.
In January, after completing that investigation, the NYSE asked Spitzer to consider suing Grasso, using his authority under the state's not-for-profit law to ensure that executive pay is reasonable and not excessive. If Spitzer prevails, any money he recoups will go back to the NYSE, which underwent a major management shakeup in the wake of the Grasso pay scandal. The new leadership of the NYSE ousted most of the old board members and ordered an independent investigation into the Grasso pay debacle.
Spitzer said the process that led to the big pay package for Grasso is indicative of a much larger problem with excessive corporate pay at U.S. companies. Spitzer said he believes the cozy relationships that existed between Grasso, Langone and others who had a hand in negotiating the pay package are not unique.
"This case represents everything that can go wrong in setting executive compensation," he said.
The New York politician, who has made a name for himself prosecuting Wall Street conflicts of interest, also took aim at the clubby nature of the NYSE, whose members include some of Wall Street's biggest brokerage firms. The lawsuit alleges that not only was the compensation excessive, it was inappropriate given Grasso's role as securities industry regulator and his ability to handpick the member of the compensation committee.
One compensation committee member allegedly told Spitzer's office that after expressing concern about the pay package, he was personally confronted by Grasso.
"The director testified that he 'was taken aback that my hesitancy was reported immediately
to Grasso,'" Spitzer said in a statement. "The committee member, who ultimately approved Grasso's compensation package, said: 'Thank God I escaped that one. This man was also our regulator, and I'm a member of the New York Stock Exchange ... and when he's ... your supervisor or your regulator, you have to be careful.'"
Spitzer also noted that
Chief Executive Officer James Cayne testified that some at the firm believed it "would get better treatment" from the NYSE if he were a Big Board director. Cayne joined the NYSE board in 2002.
The lawsuit also notes that in 2002, Grasso interceded to personally help Langone with an NASD investigation of his investment firm
. The complaint contends Grasso made a call to NASD regulators on Langone's behalf.
The suit asks a state court judge to rescind the pay package and determine a reasonable level of compensation for Grasso. The exchange was named in the suit "because it failed to ensure compliance with the not-for-profit law and made the excessive payments to Grasso," Spitzer's office said.
Lawsuit's like Spitzer's are not unprecedented in New York state. In March 1997, former New York Attorney General Dennis Vacco used the same law to sue the former board of trustees of Adelphi University in trying to overturn a big pay package for the school's former president, Peter Diamandopoulos. A year later, the parties settled that lawsuit, with Adelphi recouping about $4 million.