Sept. 17, 2003: New York Stock Exchange board votes 13-7 to seek Grasso’s resignation, and he quits.
May 24, 2004: Attorney General Eliot Spitzer files suit against Grasso, alleging that his $187.5 million pay package violates New York’s Not-for-Profit Corporation Law, which provides that officers must be paid “only that compensation that is ‘reasonable’ and ‘commensurate with the services performed.’” Spitzer argues Grasso’s package is “(i) objectively unreasonable; (ii) the product of a process that permitted Grasso to improperly influence both the amounts awarded to him and the members of the New York Stock Exchange Compensation Committee and Board of Directors who were required to approve these awards; and (iii) approved by the NYSE Board of Directors upon materially incomplete, inaccurate and misleading information.” People v. Grasso, 401620/04.
March 15, 2006: Manhattan Supreme Court Justice Charles E. Ramos (See Profile) declines to dismiss four of the six counts against Grasso, saying that by granting his “allegedly unreasonable compensation, the NYSE board failed to insure the integrity and viability of the NYSE as an institution which in turn, affects the interests of the New York investing public. Accordingly, the Attorney General has the authority to bring the challenged claims.” People v. Grasso, 12 Misc.3d 384.
May 18, 2006: A First Department panel hears oral arguments as Grasso appeals Ramos’ refusal to dismiss four of the counts against him.
July 26, 2006: Ramos denies a summary judgment motion by Kenneth G. Langone, ex-head of the NYSE’s compensation committee. Langone, who was also sued by Spitzer, had asked to be removed as a defendant. Ramos declines, saying Langone’s arguments amounted to someone “trying to make a silk purse out of sow’s ears.”
Aug. 10, 2006: Ramos grants Spitzer’s request for a bench trial over whether Grasso’s actual pay package was reasonable. Grasso had requested a jury trial. People v. Grasso, 401620/04.
Sept. 14, 2006: Ramos rejects Grasso’s request for the judge to recuse himself. People v. Grasso, 13 Misc.3d 1214(A).
Oct. 18, 2006: Ramos grants the government partial summary judgment, finding that Grasso breached his fiduciary duties. Grasso’s duty, he finds, was “to be fully informed and to see to it that the Board was fully informed. He failed in this duty.” People v. Grasso, 13 Misc.3d 1227(A), 831 NYS2d 349. The same day, Langone’s appeal is heard by a First Department panel, which has yet to render a decision.
Nov. 29, 2006: First Department hears oral arguments in Grasso’s appeal of Ramos’ decision to hold a bench trial on the pay-package reasonableness question, as well as on the judge’s refusal to recuse himself.
Jan. 10, 2007: Oral arguments are held in Grasso’s appeal of Ramos’ ruling that Grasso had breached his fiduciary duties. His attorneys argue that Grasso acted as a “reasonably prudent” person would act, and that he fulfilled his duty to the NYSE. The appellate court has not yet rendered a decision.
May 8, 2007: Reversing Ramos’ March 2006 ruling, a First Department panel votes 3-2 to dismiss four of the counts against Grasso. People v. Grasso, 42 AD3d 126.
March 11, 2008: A First Department panel unanimously rules that Ramos’ decision to remain on the case did not constitute an “abuse of discretion.” People v. Grasso, 49 AD3d 303.
April 24, 2008: A divided First Department panel holds that Langone must face trial to determine if he misled board members about Grasso’s deferred compensation. Langone has filed a motion seeking leave to reargue and appeal to the Court of Appeals. People v. Grasso, 50 AD3d 535.
June 25: The Court of Appeals unanimously affirms the First Department’s May 8, 2007, ruling that the state does not have parens patriae power to bring four nonstatutory claims against Grasso and upholds dismissal of these counts.
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 [email protected] and [email protected].
