Wednesday, May 26, 2010

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

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