Wednesday, January 17, 2007

Executive Compensation, Legal Fees, and the Grasso Case

Eliot Spitzer sued former NYSE Chairman and CEO Richard Grasso to compel him to return the bulk of his nearly $190 deferred compensation and pension package, alleging that the pay package was “objectively unreasonable” under New York law governing nonprofit institutions and that Grasso had improperly influenced or misled the NYSE’s board directors to obtain their approval of the package. (The NYSE was a nonprofit institution while Grasso served as its Chair.) A copy of the complaint against Grasso can be found here.

Spitzer may have moved on the New York governor’s mansion (refer here), but the case lives on, as highly contested cases will do. The case is currently on appeal, as Grasso challenges the entry of partial summary judgment against him by New York Supreme Court Justice Charles Ramos. Justice Ramos ruled in October 2006 that Grasso had breached his fiduciary duty and that Grasso must return almost $100 million. A copy of Justice Ramos’s opinion can be found here.

Litigation at this level is expensive, but the magnitude of the expense involved may exceed even the inflated standards of our age. In a January 17, 2007 interview reported on Bloomberg.com (here), Grasso said that the “costs of all sides involved…may have exceeded $100 million,” which the article notes is an amount almost equal to the amount the New York Attorney General is seeking. Grasso is quoted as saying, “I would not be surprised if the legal bill were in excess of $100 million.” Grasso added that “This lawsuit is about honor. It is not about money any more.”

Indeed. It is always about honor. But the money does play a role, however slight it may concern Grasso, and unless the goal of the lawsuit is a massive wealth transfer to the legal community, the expense apparently involved does raise certain questions.

Of course, Grasso’s legal fee estimate may or not bear any relation to reality. Perhaps to a man accustomed to astronomical dollar figures, a number like $100 million is simply a proxy for a number of a very large size, sort of like the biblical author used the phrase 40 days and 40 nights. Grasso is also obviously motivated to characterize the lawsuit in a particular way, and so has every incentive to portray the lawsuit as excessive or even counterproductive.

But there unquestionably is something arresting about Grasso’s estimate. The prospect that the lawsuit might consume in fees as much as the case ultimately is worth brings to mind the litigation travails of another Richard, Richard Carstone, who exhausted himself pursuing his interests in the matter of Jarndyce and Jarndyce in Dickens’ novel, Bleak House. Perhaps the comparison between the two cases is not entirely apt, but there is a familiar resonance surrounding the magnitude of the fees and their relation to the matters in dispute.

The following excerpt from the novel (drawn from this source) captures the moment when the parties found the case to be “over” – not due to resolution on the merits, but because of the cumulative effect of the lawyers’ fees (the excerpt begins with the words of Mr. Kenge, an attorney):
“For many years, the--a--I would say the flower of the bar, and the--a--I would presume to add, the matured autumnal fruits of the woolsack--have been lavished upon Jarndyce and Jarndyce. If the public have the benefit, and if the country have the adornment, of this great grasp, it must be paid for in money or money's worth, sir."

"Mr. Kenge," said Allan, appearing enlightened all in a moment. "Excuse me, our time presses. Do I understand that the whole estate is found to have been absorbed in costs?"

"Hem! I believe so," returned Mr. Kenge. "Mr. Vholes, what do YOU say?"

"I believe so," said Mr. Vholes.

"And that thus the suit lapses and melts away?"

"Probably," returned Mr. Kenge.

"Mr. Vholes?"

"Probably," said Mr. Vholes.

"My dearest life," whispered Allan, "this will break Richard's heart!"


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