Thursday, May 13, 2010

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.

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