N.Y. Court Backs Grasso in Pay Suit

Dismissal of 4 Claims Is Upheld; 2 Charges Remain

New York's top court yesterday upheld a lower court ruling that tossed out four of the state's legal claims challenging the nearly $190 million compensation package of former New York Stock Exchange chairman Dick Grasso.

The justices ruled that former state attorney general Eliot L. Spitzer, who brought suit against Grasso alleging that his compensation was excessive, did not have the legal authority to make the claims.

Although the court decision did not affect two other claims included in the lawsuit, legal analysts said those would require a higher burden of proof, making it more likely that Grasso would be able to keep his money.

Chief Judge of the State of New York Judith Kaye wrote that the size of the package awarded to Grasso in 2003 was not itself sufficient grounds to challenge it based on state law.

"The Attorney General may not circumvent that scheme, however unreasonable that compensation may seem on its face. To do so would tread on the Legislature's policy-making authority," she wrote.

Spitzer brought suit in 2004, a year after Grasso was removed from his post, claiming that the compensation package was exorbitant for the executive of a not-for-profit corporation. According to court documents, Spitzer contended that the compensation was not justified by the work performed by Grasso and therefore a violation of the Not-For-Profit Corporation Law. The suit also alleged that Grasso handpicked the NYSE board members who decided his package and they had ignored the board's system for calculating compensation.

The four claims against Grasso that have been tossed out were not based on specific state laws, but Spitzer argued that as attorney general he had the right under common law to act in the public interest. By contrast, the two remaining charges are based on state statutes regarding unlawful transfer of corporate assets and breach of fiduciary duty.

The ruling could make it more difficult for Spitzer's successor, Attorney General Andrew M. Cuomo (D), to recoup the funds because the government would have to prove that Grasso intended to act improperly, not just that his pay was excessive.

"It's more complex in the sense that they have to prove more than they otherwise might," said Richard Schulman, counsel at Bryan Cave who specializes in securities and business fraud litigation.

Schulman said the attorney general would continue with the case, however, because it still includes two of its original six charges and because a lower court found Grasso to be in violation of his fiduciary duty.

The Albany court's decision yesterday is being viewed by some legal and financial experts as a blow to attempts to rein in executive compensation.

"I think that this ruling clearly indicates that a court is going to be very skeptical in overruling an internal compliance committee in their determination so far as what is fair and reasonable compensation," said Steven Caruso, a partner at Maddox Hargett & Caruso.

Three agreements, executed in 1995, 1999 and 2003, governed Grasso's compensation, according to court documents. From 1995 to 2002, his base salary was about $1.4 million, but his bonus awards escalated from $900,000 in 1995 to $10.6 million in 2002. The 2003 agreement provided Grasso with an immediate lump-sum payment of $139.5 million and an additional $48 million payable over four years -- compensating him for past and future work.

"This is historic. It's pretty hard, judicially, to cap executive pay. It always has been," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. "Our legal regime is not designed to limit pay. The most effective way to limit pay is to hold accountable those who set pay, a la, the directors."

Grasso resigned from his position after mounting criticism of his package and a vote by board members to ask him to leave. An internal investigation was also launched. At the time of his tenure, the NYSE was a not-for-profit corporation.

Mark Zauderer, co-counsel for Grasso, declined to comment. Calls to Cuomo's office and to state Solicitor General Barbara Underwood were not returned.

Staff researcher Madonna Lebling contributed to this report.