Litigation Communications in People v. Grasso - The Litigation

( This is the fourth of six posts examining the litigation communications strategies in the lawsuit challenging the $139.5 million paid by the New York Stock Exchange to its CEO, Richard Grasso, shortly before the NYSE Board asked for his resignation. The three previous posts can be found here, here, and here.)

On May 24, 2004, Attorney General Spitzer filed a complaint in New York State court alleging that Grasso and Langone had violated certain provisions of the New York Not-for-Profit Corporation Law (N-PCL) and state common law. Specifically, the complaint included eight separate causes of action, six of which were directed at Grasso and one of which was directed at Langone, as (former) chair of the NYSE compensation committee. Attorney General Spitzer alleged that (1) Grasso’s annual compensation and benefits were unlawful and ultra vires under the N-PCL; (2) Grasso had received an unlawful conveyance by knowingly receiving unreasonable compensation; (3) Grasso had breached his fiduciary duty to the NYSE by accepting and influencing awards of unreasonable compensation; (4) Grasso was unjustly enriched by receiving compensation that was not commensurate with his services; (5) the compensation payments did not receive sufficient board approval; and (6) certain payments under the Grasso retirement plans constituted unlawful loans. The complaint also alleged that Langone breached his fiduciary duty of care by failing to properly provide compensation committee members with necessary information to render an informed decision on Grasso’s compensation.

Attorneys for Grasso and Langone were unsuccessful in their initial attempts to challenge the sufficiency of the complaint. Grasso’s lawyers argued for the dismissal of causes of action 1, 4, 5, and 6 above (the non-statutory causes of action) as not being authorized under the N-PCL or New York common law. On March 15, 2006, the trial court issued a ruling denying Grasso’s motion to dismiss the four non-statutory causes of action. Langone’s lawyers filed a motion for summary judgment to dismiss the cause of action against him. On August 4, 2006, the trial court denied that motion. Later, on October 19, 2006, the trial court denied Grasso’s motion to dismiss causes of action 2 and 3 above (the statutory causes of action). The trial court also issued a “partial summary judgment” ruling, in which Grasso was found to have breached his fiduciary duty to regularly advise the compensation committee concerning the amount of his benefits derived from the Supplemental Executive Retirement Plan (SERP) and the Supplemental Executive Savings Plan (SESP), and he was ordered to return $100 million to the NYSE. The trial court’s decision turned out to be the last one adverse to Grasso.

Grasso appealed the trial court’s decision denying the motion to dismiss the non-statutory causes of action. On May 8, 2007, the Appellate Division reversed, ruling that Attorney General Spitzer’s authority to bring suit against not-for-profits was limited by the N-PCL and that he lacked authority to assert the non-statutory causes of action. However, on April 14, 2008, the Appellate Division affirmed the trial court’s decision to deny Langone’s motion for summary judgment.

In late June and early July 2008, a series of decisions favorable to Grasso and Langone ended the litigation. On June 25, 2008 the New York Court of Appeals unanimously affirmed the Appellate Division’s dismissal of the four non-statutory causes of action as being beyond the Attorney General’s authority. Less than a week later, on July 1, 2008, the Appellate Division reversed the trial court’s October 19, 2006 decision to grant partial summary to the Attorney General on the statutory causes of action. First, the Appellate Division found several errors in that part of the October 19, 2006 decision that concluded that Grasso had violated his fiduciary duty of care to the NYSE with respect to his participation in the SERP and the SESP plans. Second, the Appellate Division noted that during the pendency of the litigation, the NYSE had converted from a not-for-profit to a for-profit corporation. The Appellate Division held that the Attorney General’s authority to maintain an action under the N-PCL ended with the conversion.

Following these two decisions, New York Attorney General Cuomo announced that he would not pursue the issue of Grasso’s compensation any further.

NEXT: The Communications Strategy

Litigation Communications in People v. Grasso - Background, Part Two

( This is the third of six posts examining the litigation communications strategies in the lawsuit challenging the $139.5 million paid by the New York Stock Exchange to its CEO, Richard Grasso, shortly before the NYSE Board asked for his resignation. The two previous posts can be found here, and here.)

The totality of Grasso’s compensation became an issue when he tried to draw down some of his retirement benefits with the renewal of his contract in 2003. Some members of the Board of Directors said that Grasso had expressed concern that a future board might be less willing to give him the money that had accumulated under the NYSE's several compensation programs, a charge Grasso denied. Whatever the case, in early August, the Compensation Committee devised a contract that awarded Grasso with an immediate lump sum payment of $139.5 million and an additional $48 million to be paid over four years for past and future work. Some directors, including Henry M. Paulson Jr., then the head of Goldman Sachs, argued against paying out Grasso’s retirement benefits before he actually retired. Others, including Langone, said Grasso was entitled to the money he had earned. The Board of Directors eventually approved the contract for $187.5 million in late August, and on August 27, 2003, the NYSE issued a press release revealing that $139.5 million would be immediately payable to Grasso. The press release did not disclose the $48 million future payment.

The press release hit Wall Street like a tsunami. Few of the traders at the NYSE had a sense of the magnitude of Grasso’s compensation, and many expressed anger that Grasso’s pay was soaring at a time when trading was becoming less profitable and fees were going up. Then, in September 2003, the Chairman of the SEC contacted the NYSE and requested information concerning Grasso’s compensation. In response to increasing internal and external pressure, Grasso agreed to forgo the future $48 million payment. However, when news that his 2003 contract had included this additional $48 million payment, the Board of Directors decided to demand Grasso’s resignation.

Following Grasso’s termination, the NYSE began an internal investigation into the circumstances that led to Grasso’s August 2003 contract. In January 2004, after the internal investigation was concluded, John Reed, the Interim Chairman and CEO of the NYSE wrote a letter to New York Attorney General Eliot Spitzer, stating that serious damage had been inflicted upon the NYSE. Reed requested that either the Attorney General or the Chairman of the SEC pursue the matter of Grasso’s “unreasonable compensation” and other “failures of governance and fiduciary responsibility.”

Attorney General Spitzer, then known as the Sheriff of Wall street, accepted the invitation. After a four month investigation, Spitzer filed a lawsuit challenging Grasso's pay in late May 2004. We'll examine the litigation in the next post.

Litigation Communications in People v. Grasso - Background, Part One

( This is the second of six posts examining the litigation communications strategies in the lawsuit challenging the $139.5 million paid by the New York Stock Exchange to its CEO, Richard Grasso, shortly before the NYSE Board asked for his resignation. The previous post can be found here.)

Richard A. Grasso began working at the NYSE in 1968 as an $81.00-a-week union stock clerk. He worked his way up through the ranks to become the NYSE’s Chairman and Chief Executive Officer in 1995. Throughout Grasso’s tenure as CEO, the NYSE’s Board of Directors had a Compensation Committee that reviewed Grasso’s performance and set his annual compensation. From 1999 to 2003, the Committee was chaired by Kenneth G. Langone, a co-founder of The Home Depot and a member of the NYSE Board of Directors.

While Grasso was CEO of the NYSE, he executed employment agreements in 1995, 1999, and 2003. Each contract fixed Grasso’s annual salary at $1.4 million and permitted him to participate in various compensation and benefits programs designed to attract “world class talent” to the NYSE. These programs included: an incentive compensation plan (ICP), based upon the NYSE’s performance measured against certain targets (Grasso received a $13.6 million ICP award for 2000 and a $16.1 million ICP award for 2001); the capital accumulation plan (CAP), which entitled Grasso to a deferred award equal to 50% of his ICP award and which did not vest until May 2005; a long term incentive plan (LTIP), intended to reward NYSE executives if the NYSE achieved three-year performance targets (Grasso received LTIP awards for the three-year cycles ending in 1998, 1999, and 2000); the supplemental executive retirement plan (SERP), designed to provide a supplemental pension based upon compensation that exceeded federal pension limits (the size of Grasso’s compensation awards in 1999 through 2001 resulted in SERP accumulations of over $100 million); and a supplemental executive savings plan (SESP), which enabled NYSE executives to defer taxation on compensation that exceeded the federal limit on contributions to a 401(k) plan (the NYSE matched up to six percent of the executives’ base salary).

When Grasso signed his first contract in 1995, he received a lump sum payment of $6.6 million, and when he signed his second contract in 1999, he received a lump sum payment of $29 million. However, it was the lump sum payment pursuant to Grasso’s 2003 contract that caused the uproar that led to his termination and his depiction as a symbol of corporate greed. We will take a look at the 2003 contract and its aftermath next week.