The Spitzer Complaint

To begin near the beginning, we include here the primary conclusions reported by the Spitzer complaint (full text) in the State of New York.

The complaint was against CEO Grasso, primarily for excessive compensation, Kenneth G. Langone (a financier who started Home Depot) because he was chairman of the Compensation Committee at the time that Spitzer felt the most damage was done, and the NYSE for some technical problems.

According to the complaint, "Grasso exercised enormous power over the operation and governance of the NYSE. Although the NYSE Board of Directors had a Nominating Committee, Grasso effectively selected individuals to serve on the Board, and had sole authority to assign Directors to Board committees, including the Compensation Committee. Grasso also had significant influence over the compensation of NYSE employees including his own…." (Spitzer Complaint, section 5).(29)

The first part of the complaint (#1-14) specifies the defendants, the relevant law, and the place for the action. We pick up the complaint again at the "FACTS," or section 15, page 5. The entire complaint can be viewed in the eLibrary. Here, we retain the numbering of the Spitzer Complaint.

(29) See a later section on "conflicts of interest."


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. (30)

(30) Mr. Ashen was the director of Human Resources during the time period under investigation. Mercer was one of the three consultants used by the NYSE on compensation matters. (The other two consultants they used were Hewitt and Veder Price).

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. (31)

(31) #22, 23 and 24 of the Spitzer Complaint have been intentionally omitted, following point #21.


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.


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.

Question: Are you surprised at the detail included in a state attorney general’s "complaint?" As they approached November 2006 political challenges, Spitzer won his party’s nomination for Governor, but the office of the AG continued on the suit against Grasso.