Former NYSE Chief Grasso Sued Over Pay

The complaint in part reviews what is already known: Grasso handpicked members of the NYSE board and decided who would sit on the compensation committee. It also says many of the board members faced inherent conflicts of interest because they served as executives at Wall Street brokerages and investment banks that the exchange regulates.

Among examples of Grasso's manipulation of board members, the complaint says the chairman confronted a compensation committee member who had expressed concern over the level of Grasso's pay. According to the complaint, the director, who was not identified, was surprised by Grasso's comments and eventually voted to approve the pay package.

The complaint says the director testified that he recalled thinking, "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 kind of indirectly your supervisor or your regulator, you have to be careful."

The complaint also says Grasso "quietly assured" Merrill Lynch & Co. that the exchange would reverse an earlier decision to withhold approval for Merrill's proposed sale of its specialist trading unit -- which it did. Then-Merrill Lynch chief executive David H. Komansky served on the exchange compensation committee from 1997 through 2003.

James E. Cayne, chief executive of Bear Stearns Cos., testified that senior executives at his firm's specialist trading unit had urged him to join the exchange board for years because they believed it would result in better treatment for the firm, the lawsuit says. Cayne joined the NYSE board in 2002.

The complaint also says Grasso intervened on Langone's behalf when Langone was facing regulatory action by NASD, the securities industry's main self-regulatory organization. NASD said in a statement that Grasso's intervention came after its decision not to charge Langone had been made and that "not a single word in the complaint was changed as a result of the call" that Grasso placed to NASD head Robert R. Glauber.

The lawsuit also says Grasso took "no regulatory action when confronted with evidence of fraud relating to the equity research analysis being offered by many of the largest NYSE member firms."

In addition to the settlement with former NYSE human resources head Frank Z. Ashen, Spitzer announced a settlement with Mercer Human Resources Consulting Inc., a firm that advised the exchange on Grasso's compensation. Ashen will return $1.3 million in pay, while Mercer will return $440,275 in consulting fees.

The lawsuit also names the exchange as a defendant, although it faces no financial liability as a result of the charges. Instead, the NYSE would be required to pay executives more in keeping with compensation at not-for-profit organizations in the future. Spitzer on Monday praised the NYSE's new leadership, under chief executive John A. Thain and Chairman John S. Reed, and said any money recovered in his lawsuit would be returned to the NYSE. The exchange, which referred the Grasso matter to Spitzer, issued a statement saying, "We are supportive of Attorney General Spitzer's efforts in this matter. As a named party, it would be inappropriate to comment further."

Several legal experts on Monday said the case is likely to turn not on the amount Grasso was paid but on the process that led to the payments.

"It's a phenomenon of corporate law that judges often prefer to resolve these issues on procedural grounds rather than subjective grounds," said Joseph A. Grundfest, a Stanford University law professor. "It's much easier for a judge to throw out all or a portion of compensation on the argument that the board wasn't adequately informed than for the judge to say this number is simply too high and the right number is some fraction."