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Home Depot Co-Founder Fails to Get Suit Dismissed Over Grasso's NYSE Pay Package
Trial would determine if Langone breached fiduciary duty by misleading board about deferred compensation for then-chairman
New York Law Journal
April 25, 2008
A divided appeals court ruled Thursday that Kenneth G. Langone, the former chair of the New York Stock Exchange's compensation committee, must face trial to determine if he breached his fiduciary duty to the exchange by misleading board members about deferred compensation for then-Chairman Richard A. Grasso, in connection with his hotly disputed $187.5 million compensation package.
The Appellate Division, 1st Department, noting in an unsigned 3-2 opinion that discovery had produced more than 1 million documents and 61 depositions, held that Langone did not "conclusively establish" that he fully disclosed the extent of Grasso's proposed compensation to the board.
The record exemplifies the general rule that "comparison of a party's conduct with the fiduciary standard of care is a question of fact," wrote the majority in People v. Grasso, 9478, affirming Justice Charles E. Ramos' 2006 denial of Langone's summary judgment motion.
The attorney general's office is seeking restitution in an amount to be determined at trial from Langone, 72, a venture capitalist and co-founder of Home Depot Inc.
Still pending in the Appellate Division is Grasso's challenge to a ruling by Ramos that he return up to $100 million of his allegedly excessive pay package.
The state is claiming that Langone did not fully disclose to other board members the specific amount Grasso was to receive under a so-called Capital Accumulation Plan (CAP) -- a deferred compensation plan established by the NYSE for four top executives. According to the decision, Grasso received almost $18 million in CAP awards.
Following controversy over his pay package, Grasso resigned in September 2003. The state subsequently filed its complaint against Grasso and Langone.
In August 2006, Ramos denied Langone's motion for summary judgment dismissing the charge against him.
The appellate court affirmed, noting that Langone had the responsibility under Not-for-Profit Corporation Law §717(a) to "accurately convey his compensation recommendations to the Board."
"Langone also had a duty to make compensation recommendations which were in the interest of the NYSE, in good faith," the court wrote.
While it was "uncontested" that the NYSE's human resources department was told to omit CAP values from the worksheets distributed to the compensation committee, the court held that it was "unclear from the extant record" whether Langone was responsible for the "changes to the format of the compensation worksheets."
"[I]t is also unclear whether Langone adequately explained the newly formatted written materials to the Compensation Committee," the majority wrote.
In declining to dismiss the suit against Langone, the court added that "some of the [NYSE] Board members testified that they believed Mr. Grasso's total compensation for a given year was an amount" that excluded the CAP award.
Citing "inconsistent deposition testimony about Langone's oral presentations to the Compensation Committee and the Board between 2000-2002," the majority concluded that "its role is limited to identifying whether there are material issues of fact, not to determine them."
Justices Angela M. Mazzarelli, David B. Saxe and John W. Sweeny Jr. joined the decision.
Justices James M. McGuire and John T. Buckley vehemently dissented in an opinion by McGuire.
'UNDISPUTED EVIDENCE'
The dissenters claimed the "undisputed evidence submitted on the motion demonstrated" that Langone had "remind[ed]" the board every February, when it approved Grasso's compensation, about his additional CAP awards.
The worksheets' failure to disclose the precise amount of the CAP award was "irrelevant," since only the compensation committee, not the full board, received the worksheets, McGuire wrote.
"This undisputed fact -- the majority ignores it -- is critical because ... the operative allegation of the complaint," is that Langone misled the board of directors, he wrote.
McGuire also disagreed with the majority that the record was unclear as to who was responsible for omission of the CAP values in the worksheets reviewed by the committee.
"Langone had nothing whatsoever to do with these changes. Not a shred of evidence is to the contrary," he wrote.
While the inclusion of the CAP awards might have increased the worksheets' clarity, "it hardly follows that the statement actually made is not clear, let alone that it is false or misleadingly incomplete," McGuire added.
He faulted the majority for relying on "supposed deposition testimony or other ostensible evidence" to support "baseless" assertions that Langone failed to adequately disclose the value of the CAP awards.
"Putting aside the majority's unsupported generalizations about the deposition testimony, no material issue of fact is raised by any of the deposition excerpts the majority paraphrases or quotes," he added.
The dissent also criticized the majority for "mint[ing] an entirely new theory of liability" by finding that the record "raise[d] questions as to whether Langone's executive compensation recommendations were in the best interest of the" exchange.
"The Attorney General has never asserted that Langone is liable on this ground, not in his complaint, not in opposing Langone's motion and not in the brief submitted to this Court," McGuire concluded.
The court heard arguments in the case on Oct. 18, 2006.
Gary P. Naftalis of Kramer Levin Naftalis & Frankel served as counsel to Langone.
"In light of the dissent of two of the members of the panel," it is likely his client will appeal, said Naftalis.
Avi Schick handled the appeal for the attorney general.
