ALBANY – A significant portion of the state’s case against Richard A. Grasso and his lucrative compensation package as the former chairman and CEO of the New York Stock Exchange was thrown out yesterday by the Court of Appeals.
The Court determined 7-0 that then-Attorney General Eliot Spitzer did not possess the authority to bring four claims against Mr. Grasso based on the attorney general’s common law power of acting as the protector of the rights of those who are unable to protect themselves.
“However unreasonable” Mr. Grasso’s $187.5 million compensation package may have seemed, the state Legislature has not given the attorney general the power to pursue the four claims, Chief Judge Judith S. Kaye wrote for the Court in Spitzer v. Grasso, 120.
The ruling did not apply to two other fault-based claims brought by the attorney general against Mr. Grasso based on alleged violations of the state’s Not-for-Profit Corporation Law. Those claims are on appeal before the Appellate Division, First Department.
However, even if those claims are upheld, they would be more difficult to prove than the claims that were dismissed. Legal experts said yesterday’s ruling would likely increase the pressure for a settlement in the litigation, which was one of Mr. Spitzer’s highest-profile cases when he was burnishing his reputation as the “Sheriff of Wall Street” prior to becoming governor.
The current, attorney general, Andrew M. Cuomo, has continued to pursue the litigation against Mr. Grasso.
The ruling also has implications beyond the Grasso case because some authorities say it could weaken the attorney general’s hand in the regulation of charities and other not-for-profit organizations. Ironically, the stock exchange has become a for-profit corporation and is no longer covered by the statute under which the state went after Mr. Grasso.
The four claims dismissed yesterday were premised on the Not-for-Profit Corporation Law, but “clothed” in the attorney general’s common-law parens patriae powers, the Court noted. Parens patriae allows the attorney general to step in to defend the rights of those unable to protect themselves without explicit statutory authorization.
In Mr. Grasso’s case, the attorney general argued that the members of the New York Stock Exchange and its investors were unable to prevent exchange directors from granting Mr. Grasso a series of excessive compensation packages culminating in an agreement in 2003 for a $139.5 million lump sum payment (NYLJ, June 4). The size of the 2003 package swelled to $187.5 million when future payments were factored in.
Public disclosure of the package led to intense public criticism and Mr. Grasso’s resignation. Mr. Spitzer sought to have Mr. Grasso return as much as $112 million.
While the Not-for-Profit Corporation Law gives the attorney general broad enforcement powers over not-for-profits, the Court held that there are limits. That is particularly the case where the officers and directors of not-for-profits are discharging their duties in good faith and in a reasonable manner, according to the Court.
The attorney general’s four claims failed to overcome the burden that the Not-for-Profit Corporation Law sets in §717(b) that people who perform their duties reasonably “shall have no liability by reason of being or having been directors or officers of the corporation,” the Court ruled.
“In summary, each of the challenged causes of action against Grasso seeks to ascribe liability based on the size of his compensation package,” the chief judge wrote. “The Legislature, however, enacted a statute requiring more. The Attorney General may not circumvent that scheme, however unreasonable that compensation may seem on its face.”
The decision upheld a 3-2 ruling by an Appellate Division, First Department, panel in Spitzer v. Grasso, 42 AD3d 126 (2007). The majority in that ruling also dismissed the four causes of action the Court of Appeals objected to yesterday (NYLJ, May 9 2007).
Still alive are state claims that Mr. Grasso violated his fiduciary duty to the exchange and that he is liable for making an unlawful conveyance of corporate assets.
Gerson A. Zweifach of Williams & Connolly in Washington, D.C., Mr. Grasso’s counsel, said his client was “gratified” by yesterday’s ruling.
“He never lost faith in the court system,” said Mr. Zweifach.
Mark C. Zauderer, a partner at Flemming Zulack Williamson Zauderer who serves as co-counsel, declined to comment.
Mr. Cuomo’s office had no comment on yesterday’s ruling. Solicitor General Barbara D. Underwood argued for Mr. Cuomo before the Court of Appeals.
A spokesman for the exchange also declined to comment.
Pressure for Settlement
Legal experts familiar with the case said the ruling may prompt Mr. Cuomo to reassess the litigation and to consider a settlement.
Harry Sandick, a former federal prosecutor in the Southern District of New York and special counsel at Schulte Roth & Zabel, termed the decision a “rebuke” to the attorney general, though he said it was aimed more at Mr. Spitzer because he devised the claims rejected by the Court.
The last two statutory claims remaining against Mr. Grasso have a fault-based element that will require Mr. Cuomo to make “some showing of intentional wrongdoing,” Mr. Sandick said in an interview.
“By imposing a requirement of knowledge or bad faith, the statutory claims will be harder to prove,” Mr. Sandick said. “I think if you’re in the attorney general’s office now, you certainly have to ask yourself whether you have evidence or knowledge of bad faith on the part of Grasso, and if you don’t or you don’t have compelling evidence, you’d be wise to try to resolve this case before trial.”
Some lawyers said they believe Mr. Cuomo has a convenient out, if he is looking for one, because the action against Mr. Grasso was begun by Mr. Spitzer and not by Mr. Cuomo.
Ira Lee Sorkin, co-leader of Dickstein Shapiro’s white-collar criminal defense and investigations practice, said the decision “might induce the attorney general to settle the case” on terms “more favorable” to Mr. Grasso.
“The present attorney general is very busy with his own agenda . . . and I believe would like nothing more than to rid himself of the baggage left by his predecessor,” Mr. Sorkin said.
Former federal prosecutor Robert A. Mintz, now a litigation partner at McCarter & English, agreed that yesterday’s ruling would “ignite renewed opportunity to talk settlement.”
“Whenever the attorney general’s office has a significant portion of the case thrown out, that always tends to embolden the defense and in some way raises the stakes for both sides,” Mr. Mintz said.
Professor John C. Coffee of Columbia Law School said yesterday’s ruling would “greatly reduce the value of the settlement” for the attorney general but not leave a “negative mark” on Mr. Cuomo’s resume were he to conclude the litigation.
Stephen L. Ascher, a securities litigation partner at Jenner & Block, agreed.
“I think it would be easy for the Cuomo administration to pass this off as a Spitzer initiative,” he said. “No one will blame Cuomo for the result if he settles it on the cheap.”
However, Mr. Coffee added that the ruling has implications that reach beyond the Grasso case. He said the decision damages the attorney general’s parens patriae authority and his power to bring nonstatutory claims against not-for-profits.
“The New York attorney general has lost his prior common law authority over not-for-profit corporations and that may leave him with too little power to attack cases of egregious self-dealing in charities,” Mr. Coffee said.
He added that the state Legislature may have to consider restoring that authority to the attorney general.
Assemblyman Richard Brodsky, the chairman of the corporations committee in his chamber, said he would consider the effects of yesterday’s ruling on the attorney general’s traditional role as regulator of not-for-profit corporations.
“We are going to look very carefully at it and if remedies are needed to protect the public interest, we are prepared to do that,” Mr. Brodsky, D-Elmsford, said.
- Joel Stashenko and Noeleen G. Walder can be reached respectively at firstname.lastname@example.org and email@example.com.