Executive Pay: Grasso Wins a Round over Spitzer’s Ghost

In a partial but significant victory in the New York Supreme Court Appellate Division, former NYSE Chairman Richard Grasso may have accomplished just enough to be able to keep his infamous NYSE pay package. In April 2004, Eliot Spitzer, then New York’s Attorney General, sued Grasso to compel him to return the bulk of his nearly $190 million deferred compensation and pension package. Spitzer alleged in the Complaint (here) that the pay package was “objectively unreasonable” under New York law governing nonprofit institutions – the NYSE was a nonprofit institution while Grasso was its Chair – and that Grasso had improperly influenced or misled the NYSE’s board of directors to obtain their approval.

In an October 2006 ruling, New York Supreme Court Judge Charles Ramos entered partial summary judgment against Grasso, holding that Grasso had breached his fiduciary duty and that Grasso must return almost $100 million. A copy of Judge Ramos’s opinion can be found here. Grasso appealed from this ruling as well as prior rulings in which Judge Ramos had permitted the claims to proceed.

A May 8, 2007 opinion of the New York Supreme Court Appellate Division (here) reversed an earlier ruling of Judge Ramos (here), and granted Grasso’s motion to dismiss the first, fourth, fifth and sixth causes of action against him. Each of the dismissed counts were ones that Spitzer had alleged that New York’s Attorney General had an implied right of action to pursue under the states Not-for Profit Corporation law. The appellate court held, however, that “these four causes of action are not within the scope of the Attorney General’s authority.” The appellate court contrasted these four claims with the two claims against Grasso that were not dismissed; the other two claims were based upon specific statutory provisions granting the Attorney General the right to pursue a cause of action. In essence, the appellate court held that the Attorney General is not “authorized to bring causes of action against directors and officers of not-for-profit corporations other than the causes of action the Legislature expressly authorized the Attorney General to bring.”

Even though two of the Attorney General’s six causes of action against Grasso remain pending, this appellate decision represents a significant victory for Grasso and may ultimately allow him to prevail. Under the two remaining causes of action, unlike the four that were dismissed, the Attorney General must prove both that the payments were “unlawful” and that Grasso knew of the “unlawfulness.” Whether or not the Attorney General can prove the unlawfulness of Grasso’s pay package, proving that Grasso knew of the “unlawfulness” will be a difficult and perhaps impossible task.

With Eliot Spitzer now occupying the New York Governor’s Mansion, the decision whether or not to proceed will now fall to New York’s new Attorney General, Andrew Cuomo. Cuomo of course has nothing vested in the case, and he must now decide whether it is in New York’s interest to try to overcome the obstacles and to try to compel Grasso to repay his compensation. According to AP (here), a spokeperson for Spitzer said the "state was expected to appeal." The same article quotes Spitzer as saying "This was just a technical issue related to some of the counts and was not the subject of the summary judgment we won." Well, maybe...

Grasso has made it clear that he intends to fight, and he has already expended a significant amount of his fortune fighting the case, as noted in a prior D & O Diary post (here, replete with quotations from Bleak House).

Because the appellate decision deals only with the Attorney General’s authority to pursue supposedly implied causes of action under New York’s Not-for-Profit Corporation law, it is unlikely to have any significant impact on other efforts to recoup allegedly excessive executive compensation.

Hat tip to the WSJ.com Law Blog (here) for the link the the appellate decision. A May 9, 2007 Wall Street Journal article discussing the decision can be found here (subscription required). A very detailed May 9, 2007 New York Law Journal article discussing the decision can be found here.

ISS Webcast: Adam Savett of ISS (and of the Securities Litigation Watch blog) will be hosting a webcast at 9:30 am on Wednesday May 9, 2007 on the topic Accountability Goes Global: International Investors and U.S. Securities Class Actions. Details about the webcast can be found here. Some of the preliminary findings to be discused are reviewed here.