Litigation Communications in People v. Grasso - The McCarthy/Langone Communications Strategy

(This is the last 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 five previous posts can be found here, here, here, here, and here.)

The McCarthy/Langone Strategy– Litigation Communications Is Public Relations

In May 2004 Grasso’s co-defendant, Kenneth Langone, pictured above, retained Jim McCarthy of CounterPoint Strategies as his communications adviser. While Starkman counseled Grasso to use a ‘non-engagement’ litigation communications strategy, McCarthy counseled a starkly contrasting ‘full-engagement’ strategy for his client. The strategy’s three components had a distinct PR flavor; improving Langone’s public image, tarnishing Attorney General Spitzer’s public image, and confronting reporters that McCarthy and Langone felt were biased, inaccurate, and in collusion with the Attorney General. In an interview with PR Week two weeks after the lawsuit was filed, McCarthy explained the strategy: “We will be very aggressive in defending Ken’s long track record of integrity. . . . We are also going to be pointing out some of the ulterior motives going on here, such as Mr. Spitzer’s political ambitions, the arbitrary way he’s put this case together, his egregious grandstanding on this. He’s flat wrong in this case. . . . [Spitzer has] relied on these bullying tactics for so long, but my practice is built on standing up to these bullies.”

McCarthy’s strategy was evident from the beginning of the litigation. On the day the lawsuit was filed, Langone issued a written statement insisting that the NYSE board’s compensation decisions were “diligent and sound” and accused Spitzer of grandstanding from “a very shaky soapbox.” Friends of Langone, such as Ross Perot (“There is no way you’d ever get Ken Langone to do anything that was purposely wrong”) and Rudolph Giuliani (“He’s a very, very honest man”) were made available to the press to vouch for Langone’s integrity.

Like Grasso, Langone also succeeded in getting an Op-Ed in the Wall Street Journal. Langone’s Op-Ed, “Let’s Bring on the Jury, Mr. Spitzer,” was a defense of Langone and a very personal attack on Spitzer: “Reasonable observers are far more likely to see through the political cynicism of Mr. Spitzer and his cheerleaders. This is a man, after all, who sent out photos of himself wielding a flaming baseball bat, asking people to pony up $100,000 apiece for his political bank account. . . . There appears to be an idea that a court fight – that is to say, a public fight – would be unseemly. But the vulgarity lies with an attorney general who believes he can bend honest men to disgrace their own hard work.”

Shortly after the Op-Ed ran, McCarthy said that Langone would be doing more outreach “fairly soon,” which would include media interviews. However, Langone did more than give interviews; he gave speeches, such as one before the Cato Institute where he asserted “I believe business leaders have a responsibility to take [Spitzer] on, not for personal reason, but for civic responsibility,” and openly raised money for Spitzer’s political opponents. Unlike Grasso, there does not appear to be any point during the litigation where Langone went “radio silent.” Not surprisingly, it did get personal between Langone and Spitzer. For example, Langone accused Spitzer of sending a message to him through an intermediary, Jack Welch, the former head of GE, that Spitzer “would drive a stake through his heart.” Spitzer denied using those exact words, and said in an interview that what he said to Welch was: ''Ken's kind of like a vampire -- you kind of have to put a stake through his heart to stop him.''

Conclusion

Although their litigation communications strategies were very different, the advisors for Grasso and Langone both achieved the goal of protecting their clients’ public images. After the litigation ended, the Wall Street Journal published an editorial entitled “Langone’s Heart” - a sly reference to the organ Spitzer wanted to put a stake through. The Journal opined: “This week’s dismissal of the case against Dick Grasso is sweet vindication for the former New York Stock Exchange CEO. But beyond the debate over his $190 million pay package, there are lessons here about prosecutorial discretion, pack journalism and business courage under political pressure. These columns defended Mr. Grasso from the beginning, not because we cared a whit about his pay but because it looked like one more case of overreach by Lord High Executioner Eliot Spitzer. . . . Mr. Grasso is fortunate he had the resources to fight back. He’s also fortunate he had an ally in Kenneth Langone… . Mr. Spitzer no doubt figured the pair would settle under his publicity barrage, but Mr. Langone had the guts to defend himself and the principles at stake.”

Litigation Communications in People v. Grasso - The Starkman/Grasso Communications Strategy

( This is the fifth 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 four previous posts can be found here, here, here, and here.)

Shortly after the New York Stock Exchange Board asked for his resignation, Richard Grasso, pictured above, retained the services of Erik Starkman, president of Starkman & Associates and a former financial journalist, as his communications professional to help him deal with the media frenzy his termination caused. Grasso's co-defendant, Kenneth Langone, retained Jim McCarthy of CounterPoint Strategies as his communications adviser. Starkman and McCarthy pursued starkly contrasting styles of communications counsel in guiding their clients through the litigation.

The Starkman/Grasso Strategy - Litigation Communications Is Not Public Relations

For his legal representative, Grasso retained Brendan Sullivan of Williams & Connolly, a lawyer most known to the public for his representation of Oliver North in the Iran-contra affair. The collaboration between Starkman and Grasso’s legal team highlights one of the subtle differences between public relations and litigation communications. Public relations focuses on improving the client’s general image. Litigation communications, on the other hand, is designed to protect the client’s image by providing the context and clarity needed to give the general public a common sense understanding of the client’s legal position, and to articulate the position in a way that supports the client in the public eye without compromising legal arguments. In this particular instance, Starkman’s advice to Grasso was that actively engaging the media was not the best communications strategy. As Grasso explained in his PRWeek interview: “I had the good judgment of Eric Starkman saying there’s no way in the current environment that you’re going to effectively counterpunch. There [was] no need to try and parry in the press.” Instead, Starkman devised a ‘non-engagement’ communications strategy that had three components. The first component involved monitoring the media. As Grasso related in his interview: “Eric and I spoke multiple times each day for the better part of a year and a half. His team at Starkman & Associates covered the landscape of media through their use of electronic monitoring. I knew every morning exactly what was being said about me, where it was being said, and he didn’t just give me an abridged version of stories appearing in the US and around the world. He gave me a strategic understanding of why, for the most part, we weren’t going to respond. And if we were going to respond, how we would. He was more than just an aggregator of news services.”

The second component involved providing background to reporters, but not granting any on-the-record interviews, something Grasso admitted he found frustrating: “Given the environment that my lawsuit was wrapped in – we were in the middle of the period of Adelphia, Enron, Tyco – I got swept up in that current. It’s very easy for me, as a principal, to believe if you can sit down with a reporter, you’re going to change someone’s perspective. Eric was [the] best objective source to remind me that you couldn’t do that. It was a very difficult period.” Starkman, who also participated in the PRWeek interview, added: “A lot of what I did was behind the scenes with reporters. As a courtesy, every major news outlet made their cases about why they should get an interview with Dick Grasso. I heard them out, set them straight about where they were going wrong, but [at] the end of the day, it didn’t make any sense to grant on-the-record interviews.”

After Attorney General Spitzer filed the lawsuit, the third component of the strategy was to issue a response in a way that allowed Grasso and his team to control the message. The message Grasso wanted to communicate was aimed not so much at the general public as it was at the Attorney General. Spitzer was perceived as an adversary who used the weight and resources of the attorney general’s office, along with a compliant press, to bully his targets into settling. The message Grasso wanted to deliver was that he was prepared to fight the lawsuit and that settlement was not an option: “The message was a very simple one: I was firmly of the belief that my vindication would come in the courtroom when all the facts were laid out objectively for an unbiased audience to evaluate … [m]y belief from the start … was if I were to settle, it would be an admission that I did something wrong. I hadn’t and therefore settlement was not an option.”

The editors of the Wall Street Journal were willing to provide Grasso with a vehicle for him to deliver his message, an Op-Ed to run the day after the lawsuit was filed. Starkman explained that after the lawsuit was filed, “Every major business outlet wanted to speak to Dick, and we decided as a team that there was no point in making him available. The bias and support of Mr. Spitzer were so overwhelming. Our logic with the Op-Ed was we wanted Dick’s message to be delivered in his own words and in his own way. We negotiated with the Journal that we would do the Op-Ed but there were certain conditions: that they wouldn’t share it with their own newsroom. They agreed. The next day’s stories were all based on the Op-Ed, but people who really cared would just go to the Op-Ed.”

The Op-Ed, "My Vindication Will Come in a Courtroom", which you can read here, was written by Grasso, Starkman, and the lawyers at Williams & Connolly. In it, Grasso tied the lawsuit to Attorney General Spitzer’s gubernatorial ambitions and defended his compensation and the methods used to decide how much he was to be paid. Grasso believed the Op-Ed was very effective: “It was extremely effective in communicating without any ambiguity that this was not going to be a lawsuit I was prepared to settle. The Journal, to its credit, allowed my piece to run as the collaborators wrote it.” Starkman added that the Op-Ed worked because of their decision not to grant interviews: “Had Dick given media interviews, the Op-Ed wouldn’t have had the same value or impact. That was the first public comment that he made since Mr. Spitzer brought the charges. If he had given interviews and all his positions were known, the impact would have been severely diminished and The Journal may not have even wanted it.”

Even though the litigation continued until July, 2008, Grasso and Starkman’s working relationship ended in 2005. Explained Grasso: “Beginning in June 2005, we were getting to the phase of the litigation where the lawyers felt it essential to go on radio silence. . . . As much as I value the media, you’re not going to be tried in the court of public opinion. You’re going to be tried in the courtroom. That’s when you have to listen to the lawyers who say it’s time to go radio silent.” Even though Starkman's representation of Grasso ended before the lawsuit, Grasso found Starkman’s services as important as Williams & Connolly’s: “From the client standpoint, in the issues that were embedded in my litigation, the beauty of a top-flight professional communications strategist is that he’s a partner to the process. He doesn’t practice law and the lawyers don’t practice communications. They compliment and work with each other. And collectively, the two disciplines are responsible for managing the client’s best interests.”

Next: The McCarthy/Langone Strategy

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.

Litigation Communications in People v. Grasso - Introduction

( This is the first 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 turmoil surrounding Goldman Sachs has made Wall Street once again the lead story in the nation’s news media. It also provides an occasion to examine the role litigation communications played in a high profile lawsuit that involved the epicenter of Wall Street, the New York Stock Exchange.

The case was The People of the State of New York, by Eliot Spitzer, as Attorney General of the State of New York v. Richard A. Grasso, Kenneth G. Langone and the New York Stock Exchange, Inc. It was initiated by Attorney General Spitzer to force Mr. Grasso to return $100 million of the $139.5 million he received from the NYSE when he signed what turned out to be his final employment contract on August 27, 2003. The legal battle was waged from May 2004 until July 1, 2008, when a New York appellate court ruled that Grasso could keep all of his compensation.

Following his victory, Grasso gave an interview to PRWeek, where he discussed the role litigation communications played in his defense to the lawsuit. “Grasso bullish on PR’s worth,” PRWeek, July 21, 2008. Since the interview reveals Grasso’s public relations strategy, the fight over his compensation provides a good example of the use of communications in litigation.

This introduction serves two purposes. The first is to advise that a comprehensive review requires multiple posts. A post next week will begin by providing the background of the dispute. Subsequent posts will examine the twists and turns of the litigation and conclude by studying the communications strategy of Grasso and, to a lesser extent, that of his co-defendant, Kenneth G. Langone.

The second purpose of this introduction can best be described as a “point of personal privilege.” A few weeks after the NYSE fired Grasso, I participated in the NYSE’s Closing Bell Ceremony as a member of a delegation led by then-ABA President Dennis W. Archer. The photograph accompanying this introduction was taken just as Mr. Archer finished pounding the gavel, signaling the end of trading for the day. You can see my face over his right shoulder underneath the U.S. flag. The photograph shows that we ended trading on October 7, 2003, a day that the Dow finished up 22.67 points, or 0.2 percent, at 9,594.98. It was the fourth-straight day the Dow had closed up.

I had two distinct impressions after spending a day inside 11 Wall Street. First, the trading floor is much smaller than it appears on television; larger than a tennis court but smaller than a basketball court. Second, the building did not have the feel of an office building; instead it felt more like an exclusive private club.