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FACTS
Summary of the Facts
15. During Grasso's tenure as NYSE Chairman and CEO,
his compensation was governed by three agreements. The
first agreement (the "1995 Agreement") was
for a five year-period. That agreement was renegotiated
in May 1999 (the "1999 Agreement"). A third
agreement was entered into on August 27, 2003 (the "August
2003 Agreement"). The August 2003 Agreement extended
the term of Grasso's employment until June 30, 2007.
Under that agreement, Grasso received an immediate payment
of $139.5 million, and a promise of an additional $48
million to be paid over the next four years for a total
of over $187 million. This sum was comprised of deferred
compensation and pension benefits accumulated under
the NYSE Supplemental Executive Retirement Plan ("SERP").
These payments all related to past work; Grasso would
also be compensated for additional work.
16. These payments and the process that led to their
accumulation reflected a fundamental breakdown of corporate
governance and were the product of numerous breaches
of fiduciary duties owed to the NYSE. Indeed, in 2003,
a special governance committee of the NYSE recommended:
(a) restrictions on Grasso's authority to appoint to
the Compensation Committee individuals whose businesses
he regulated — CEOs of Wall Street securities firms
and NYSE members; and (b) annual public disclosure of
his compensation. By the, however, the damage had been
done.
17. The staggering sums awarded to Grasso were both
objectively unreasonable and inconsistent with N-PCL
§ 202(a)(12), which authorizes the payment of only
"reasonable compensation" that is "commensurate
with services performed." Moreover, they were attributable
to an improper and flawed methodology for determining
the compensation of Grasso and other NYSE executives
over which Grasso exercised considerable, and at some
stages, unfettered direction.
18. Moreover, the information provided to Directors
who approved Grasso's compensation awards for 1999 through
2001, and that led to the August 2003 Agreement, was
inaccurate, incomplete and misleading.
19. Both Mercer and Ashen have confirmed that the Compensation
Committee and Board were misled. Mercer has entered
into a settlement that requires it to return to the
NYSE all fees earned by its Retirement Group for work
performed for the NYSE from January 1, 2003 through
August 31, 2003. Ashen has entered into a settlement
that requires him to return $1.3 million to the NYSE.
()
20. With respect to the compensation awarded to Grasso
for 1999 through 2001, the misstatements and omissions
included the following:
| (i) |
the Board was not told
and was affirmatively misled about bonus awards
to Grasso in 1999, 2000 and 2001 totaling more than
$18 million; |
| (ii) |
information was withheld
from the Board regarding the effect that its compensation
awards would have in increasing Grasso's SERP benefits; |
| (iii) |
available information
about the amount of Grasso's accumulated SERP benefits
was withheld from the Board; and |
| (iv) |
the Board was not told
that over $36 million in payments and transfers
from Grasso's SERP benefits in 1995 and 1999 resulted
in illegal, interest-free loans to Grasso, for which
he owes the NYSE accumulated and compounded interest. |
21. With respect to the process leading to the approval
of the 2003 Agreement:
| (i) |
misrepresentations were
made to the members of the Compensation Committee
and Board with respect to $27 million of the $139.5
million paid to Grasso pursuant to the 2003 Agreement: |
| |
- $18.5 million that was represented as vested
and payable to Grasso immediately was in fact
not vested and not payable at that time; and
- the members of the Compensation Committee
and the Board were told that Grasso had accrued
all of the SERP benefits that were to be paid
to him as part of the $139.5 million. In fact,
$8.5 million of those benefits would not have
been accrued had the NYSE employed its typical
accounting practices.
|
| (ii) |
The Board was incorrectly
advised that the $139.5 million payment pursuant
to the 2003 Agreement would save the NYSE $4 million
dollars. () |
THE NYSE GOVERNANCE STRUCTURE AND
GRASSO'S
REGULATORY AUTHORITY OVER THE NYSE'S DIRECTORS
CREATED ACTUAL AND APPARENT CONFLICTS OF INTEREST
25. Grasso had the authority unilaterally to select
those who served on the Compensation Committee. He also
regulated most of them. This conflict allowed Grasso
to influence directors who might have wanted to pay
him less, and to reward directors who would pay him
more. For example, one former Compensation Committee
member was confronted by Grasso after he had privately
expressed concern to Ashen about a component of Grasso's
proposed compensation for 2000. The director testified
that "he was a little taken [a]back that there
was an ear to the committees . . . and that my hesitancy
was reported immediately." The Committee member,
who ultimately approved Grasso's proposed compensation
for that year, recalled thinking "thank God I escaped
that one. This man was also our regulator, and I'm a
member of the New York Stock Exchange . . . And when
he's kind of indirectly your supervisor or your regulator,
you have to be careful."
26. Grasso's ability to assist Compensation Committee
members is demonstrated by the "quiet assurance"
that he provided to Merrill Lynch in 1998 when it encountered
difficulty in gaining the approval of the NYSE Market
Performance Committee for a sale of its specialist division.
After that committee met and withheld its approval,
Merrill Lynch complained to Grasso. An e-mail from a
Merrill Lynch employee forwarded to Merrill Lynch Chief
Executive Officer David Komansky, who served on the
Compensation Committee from June 1997 through June 2003,
states that Grasso had "quietly assured me that
this deal will move ahead." Komansky was urged
to call Grasso to remind him "how important it
is to Merrill Lynch . . . that this deal move ahead
seamlessly," and, on November 23, 1998, he did.
The sale was approved in December 1998.
27. The industry perceived potential advantages to
those who served on the Board. For example, James E.
Cayne, the Chief Executive Officer of Bear Stearns,
testified that the senior executive of Bear Stearns'
specialist division had for many years urged him to
join the NYSE Board because the executive believed that
division would get better treatment from the NYSE if
Cayne were a member of its Board. Cayne joined the NYSE
Board in 2002.
28. In 2002, the NASD began an investigation of Langone
and Invemed, the investment bank he controls, concerning
allocation of shares in initial public offerings. Langone
conveyed this information to Grasso, who called NASD
Chairman and Chief Executive Officer Robert Glauber
on Langone's behalf. In April 2003, the NASD filed suit
against Invemed, but not against Langone.
29. Similarly, Grasso took no regulatory action when
confronted with evidence of fraud relating to the equity
research analysis being offered by many of the largest
NYSE member firms. On November 6, 2001, Grasso attended
a private meeting convened by Harvey Pitt, then Chairman
of the Securities and Exchange Commission ("SEC"),
at the Regent Hotel in New York City. Among those at
the meeting were Michael Carpenter of Citigroup, David
Komansky of Merrill Lynch, John Mack of Credit Suisse
First Boston, Henry Paulson of Goldman Sachs and Philip
Purcell of Morgan Stanley. A representative of the Securities
Industry Association was also present, as was a representative
of the NASD. A copy of Harvey Pitt's memorandum convening
the meeting is annexed to this Complaint as Exhibit
3.
30. Pitt and Grasso continued to meet with the group
of Wall Street executives into early 2002. Two meeting
participants — Henry Paulson and David Komansky
— were members of the Compensation Committee, and
a third participant — Michael Carpenter —
was a member of the NYSE Board that approved Grasso's
compensation. The other two industry participants at
the meeting — John Mack and Philip Purcell —
shortly thereafter were invited by Grasso to join the
NYSE Board of Directors.
31. While those meetings were occurring, the NYSE Compensation
Committee met in February 2002 and awarded Grasso $30.6
million in compensation for 2001. The NYSE and SEC did
not take any action to investigate, remedy or punish
the abusive and improper practices of research analysis
until later in 2002, after Merrill Lynch entered into
a settlement requiring it to end those abusive and improper
practices.
GRASSO'S COMPENSATION WAS UNREASONABLE AND THE
PROCESS BY WHICH IT WAS DECIDED WAS STRUCTURALLY FLAWED
Note to the reader: We now leave
the Spitzer Complaint, after a final summarizing section
#77 (below). Most of the material not quoted yet is
from #32 and involves a description of the calculation
of compensation, including CAP, ICP and LTIP (incentive
plans), which are discussed in Appendix
A.
77. In sum, Board members were not aware
that Grasso received CAP awards equal to over $18
million for 1999 through 2001. Because N-PCL §715(f)
required that Grasso's compensation be approved by
a majority of the entire Board of Directors, more
than $18 million of Grasso's compensation lacked the
required Board approval and is subject to recission.
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