Grasso Breached Duty to NYSE, N.Y. Judge Rules

By Carrie Johnson
Washington Post Staff Writer
Friday, October 20, 2006

A judge ruled yesterday that former New York Stock Exchange chief Dick Grasso breached his duty by failing to disclose his ballooning retirement fund in the years before his resignation, a decision that could force Grasso to hand over as much as $100 million he already received and relinquish his stake to $48 million more, prosecutors said.

In what New York State Supreme Court Justice Charles E. Ramos called a "shocking" abdication of responsibility for an executive, Grasso thwarted the stock exchange's board from fulfilling its obligations to oversee his pay and benefits before he left the nation's largest and most prestigious market three years ago.

Ramos's sharply worded order, which Grasso's lawyers called "riddled with errors," is the most important development so far in a dispute that touched off a national debate about the bounds of executive compensation.

Because the stock exchange had for years operated as a nonprofit entity, the ruling is being closely followed by that sector, which has received far less scrutiny from regulators seeking to rein in corporate pay and benefits. That, however, is beginning to change during a campaign for greater oversight of nonprofit groups by Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and the debate over the propriety of the pay package for a former leader of California's J. Paul Getty Trust.

While the numbers at stake in the Grasso case -- more than $188 million -- are unusual for their size, many businesses and nonprofit groups use deferred compensation plans similar to the one at issue in the Grasso case, legal experts said.

"This is the kind of decision that will make nonprofit CEOs sit up and take notice," said Michael W. Peregrine, a lawyer at Chicago's McDermott, Will & Emery. "They're going to spill their coffee in their laps when they read this case."

Grasso was forced out as NYSE chief in September 2003 during a furor over the reasonableness of his pay package. Much has changed since then. Critics said that Grasso had lost sight of the NYSE's roots and instead demanded to be paid like the executives of the large companies listed on the exchange. The stock exchange later merged with Archipelago Holdings and now operates as a for-profit business.

The Securities and Exchange Commission this year adopted rules requiring companies to disclose more clearly the compensation packages of their highest-paid officials. And, in part because of the Grasso uproar, board members ask more skeptical questions about compensation and ask to see tally sheets that include several years worth of deferred and retirement income, said Mary Ann Jorgenson, a corporate lawyer at Cleveland's Squire, Sanders & Dempsey.

But in New York, Attorney General Eliot L. Spitzer's two-year-old lawsuit against Grasso rages on. Yesterday's order was based on motions filed by both sides before the much-delayed trial even began. A spokesman for Spitzer, who is running for governor on the Democratic ticket, said the judge has yet to set a trial date. It is unclear whether Ramos's ruling will spur both sides to begin settlement negotiations.

Grasso's defense lawyers vowed to appeal the judge's order. They issued a statement in Grasso's name saying that the judge had rejected testimony from "dozens of directors that they approved every dime they paid me, and decided that these men and women did not know what they were doing." Grasso's team, from the Washington firm Williams & Connolly, already has contested at least three Ramos decisions and has asked for the judge to be removed from the case because, they say, he cannot be fair and impartial. An appeals court has yet to rule on that issue.

The latest ruling by Ramos has no effect on Grasso's longtime friend and fellow defendant, Kenneth G. Langone, a co-founder of Home Depot Inc. and the former chief of the stock exchange's compensation committee. Langone, who argued a separate appeal in his case Wednesday, has attacked Spitzer's case as without merit. Pointing to statements from board members, Langone maintained that the directors knew exactly what they were doing when they richly rewarded Grasso for his years of stewardship, including a difficult stretch after the 2001 terrorist attacks in New York.

But Grasso ultimately resigned during questioning about whether his pay was appropriate under New York's stringent state laws governing practices at nonprofit groups, and whether board members had known about and understood his skyrocketing compensation arrangements. Those issues will be central to the trial, whenever it takes place.

In the meantime, Ramos's latest ruling means that Grasso could be forced to turn over about $80 million in the form of retirement pay he already received, more than $10 million more in interest and a yet-to-be-determined sum in related compensation. The judge also rejected a bid by Grasso for $48 million he left on the table when he resigned.

The judge said Grasso's failure to disclose fully to the NYSE board the amount of money in his retirement fund meant that "year after year, it made decisions to pay him without knowing his true compensation."

Referring to a defense advanced by Grasso that he did not know about the size of his compensation package until the fall of 2002, when it more than tripled to top $100 million, the judge said the argument was "shocking."

"That a fiduciary of any institution, profit or not for profit, could honestly admit that the was unaware of a liability of over $100 million . . . is a clear violation of the duty of care," Ramos wrote.

Separately, the judge yesterday dismissed defamation and disparagement claims that Grasso had filed against the exchange and its former leader John S. Reed over a report that denounced his pay as "excessive." The judge also batted away defense arguments that the attorney general no longer had authority to sue because the NYSE has transformed itself into a for-profit business.

"The Attorney General represents the investing community, all of which rely on the integrity of the market," the judge wrote. "The integrity of the market mattered before the action was initiated, and it matters now."

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