Grasso's win the end of an era
New York's fight to get former NYSE CEO Richard Grasso to give back $100 million of his pay ends with a whimper.
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| Former NYSE CEO Richard Grasso tenaciously defended his pay package. |
NEW YORK (Fortune) -- When one of New York's longest running and most expensive legal shows closed Tuesday - the attempt to claw back some of former New York Stock Exchange chief executive Richard Grasso's nine-figure exit package - it also served as an epilogue of sorts on Grasso's legacy and on an era of wildly high CEO pay.
The 3-1 ruling from a New York State Appellate court was a huge victory for Grasso in his remorseless four-year battle with Attorneys General Eliot Spitzer and then Andrew Cuomo. The decision overturned a lower court's ruling that he hand over $100 million of his $139 million retirement package. Cuomo decided not to pursue the case any further.
The ruling didn't address the propriety of Grasso's pay. It simply said then AG Spitzer did not have the power to bring four charges against Grasso under New York State's not-for-profit law. Justice James M. McGuire concluded that it would "serve no legitimate public interest" for AG Cuomo to get money from Grasso that would then be passed on to a now publicly traded successor of the exchange Grasso ran, NYSE Group, which would "have an unrestricted right to do with it as it pleased."
Long the face of the NYSE and its legacy of specialist-executed floor trades, Grasso was thrown headfirst into the spotlight in 2002 and 2003 when word leaked of the extraordinary compensation granted him by the exchange's star-studded board. His combination of retirement and exit pay, then valued at $187.5 million, was labeled as about $150 million "beyond reasonable" by Dan Webb, an investigator hired by the NYSE to make an accounting of the situation.
Within the $187.5 million was a scheduled $48 million payment for past work and post-retirement consulting which Grasso never claimed, leaving his package at $139.5 million. When news of the additional payment leaked, in fact, Grasso resigned.
The controversy over Grasso's pay made national headlines, prompting calls for tougher board of director oversight, executive compensation overhaul and not-for-profit regulation.
During the press conference for the unveiling of the complaint against Grasso in May 2004, then-AG Spitzer argued that Grasso benefited from "a rigged compensation formula" and that Grasso's close personal friend Ken Langone (a co-founder of Home Depot (HD, Fortune 500)) misled the NYSE's board of directors.
AG Spitzer also accused Grasso of using the NYSE's regulatory apparatus the major commercial and investment banks all were members of the NYSE when it was a so-called non-profit - in such a fashion as to intentionally overlook problems like equity research abuses. In return, Spitzer alleged, the securities firm CEOs on the board handsomely compensated Grasso.
Grasso fought the accusations bitterly (although for sheer tenor of combativeness, it would be hard to beat Langone, who vowed to bankroll anyone who would run against Spitzer during his gubernatorial race in 2006), arguing that the board had all available facts at their disposal when they voted to give him the pay.
The political and business luminaries on NYSE's board were forced to give depositions that revealed a fairly acute disinterest in the operations of the Big Board. While all of them defended their conduct, it is difficult to imagine many boards of directors today granting a CEO his $139.5 million retirement package several years before his retirement.
As for Grasso's legacy, he managed to keep the NYSE's once-vaunted trading floor - where traders matched buyers and sellers in equity securities for a fee, busy and economically viable years after lower-cost, instantaneous electronic trading became feasible. But those floor traders, who benefited mightily from Grasso's behind-the-scenes regulatory lobbying, were furious that they were kept in the dark about his compensation when order flows began to diminish (as more and more NYSE stocks were traded in electronic markets away from the floor) and NYSE membership fees rose.
Many of them embraced Grasso's replacement, former Goldman Sachs co-chief operating officer John Thain, and his proposed merger with electronic exchange Archipelago Holdings, only to see their trading flows dry up and then cease. Electronic trades now account for about 90 percent of the exchange's orders.
So Grasso will keep his money (less legal fees) and get to pursue his interest in private equity with former PaineWebber boss Joe Grano. He told the Wall Street Journal he isn't interested in getting involved in any sort of securities exchange operation. His era is now officially over. 
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