NEW YORK - The board of the New York Stock Exchange plans to recommend that state and federal regulators pursue legal action against the previous board and former Chairman Richard A. Grasso over the size of his pay package, a person briefed on the situation said yesterday.
The move heralds what could be a new front in the still-simmering debate over whether Grasso and the former directors violated a fiduciary duty to the exchange by agreeing to the compensation arrangement that awarded him $188 million in pay.
The Securities and Exchange Commission and Eliot Spitzer, the New York attorney general, will assume responsibility for the investigation, regulators said yesterday, to determine whether a civil lawsuit should be brought against Grasso and his former directors.
If Grasso agrees to return a substantial portion of this sum, such a lawsuit would not be filed, this person said.
John S. Reed, the interim chairman of the stock exchange has said that he expects Grasso to return as much as $150 million of his pay and that he soon will be starting talks with Grasso to discuss the matter.
Grasso resigned from the exchange under pressure in September.
According to people who have been briefed by the investigation, Reed has made a series of strong arguments to Spitzer that he pursue the case.
By putting pressure on Grasso and the former directors, Reed and the board may well have an ultimate goal in forcing Grasso to settle.
"There is a possibility that a civil claim could survive a motion to dismiss," said John Coffee, a professor of securities law at Columbia University. "Bringing in Mr. Spitzer is an attempt to get further leverage over Mr. Grasso."
While Grasso has received the $139.5 million, he is owed another $48 million by the exchange, according to a second contract he signed, but he agreed to give up that additional compensation while still chief executive.
A successful lawsuit would result in Grasso returning to the exchange the monies he received.
Since taking over, Reed has overhauled the exchange's board and completed an in-depth report into the origins of Grasso's pay.
One of the conclusions of the report, conducted by Dan K. Webb, a former federal prosecutor, was that Grasso, in asking for $139.5 million in deferred compensation and pension payments early in 2003, was fearful that a new board would not grant him such a payout.
Lawyers close to the exchange have said that such a conclusion will bolster the legal case against Grasso, in that it shows he was putting his interests ahead of the institution that he headed as chairman and chief executive.
In doing so, New York prosecutors could claim Grasso may have violated his duty of loyalty to the exchange and could thus be sued to return the monies to the Big Board.
Such a lawsuit would be unprecedented, given the unique status of the New York Stock Exchange.
Spitzer's office intends to take the lead in pursuing legal action, citing a statute under New York not-for-profit corporation law, regulators who have been briefed on the investigation said. The law states that these corporations must award reasonable compensation to its officers that is in line with the services that these executives provide.
If an investigation into Grasso's pay determines that an appropriate pay scale for him was much lower than his final reward, Spitzer's lawyers could claim that the $188 million that he was awarded was far in excess of the services that he provided as chairman and chief executive.
Spitzer's office will receive a copy of the Webb report today. While his lawyers will use the report as a guidepost, they, in conjunction with SEC lawyers, will conduct their own investigations into the matter, lawyers involved in the investigation said yesterday.
Among those likely to be questioned, they say, will be a range of Wall Street and corporate America's most well known chief executives who sat on the stock exchange's compensation committees between 1999 and 2003.
Webb has already questioned many of these executives as part of his investigation.
They include Henry M. Paulson Jr., the chief executive of Goldman Sachs; Richard S. Fuld Jr., the chief executive of Lehman Brothers; James E. Cayne, the chief executive of Bear Stearns; and Gerald M. Levin, the former chief executive of AOL Time Warner. Chairing these committees through June of 2003 was Kenneth G. Langone, a personal friend of Grasso and a director of Home Depot. At one time he and Grasso served together on the Home Depot board.
If the lawsuit is successful, these directors could be fined or banned from sitting on any New York state not-for-profit institution. Any case would have to prove that directors violated their fiduciary duty to the board in awarding the outsize package to Grasso. It would also have to establish that directors, especially those on the compensation committee of the exchange between 1999 and 2003, violated a duty of care by failing to do the appropriate work in signing off on such a series of payments.
The legal role of the SEC in the investigation is less clear.
While the board of the exchange has not technically violated any federal securities law or internal rules in awarding such a sum, there is a securities law statute that states that the commission could file an action if it could be proved that directors or officers of a self regulatory organization abused their authority in any way.
Violating New York state law could be seen as such an abuse, an official close to the investigation said yesterday. The SEC could file its lawsuit together with Spitzer and, as a potential sanction against former directors, could ban them from sitting on public company boards.
While Grasso has not spoken publicly since his resignation, people who have talked with him in recent weeks say he feels he has done nothing wrong in that he was never in the room when compensation committee members met to decide how much to pay him.
A telephone call to Grasso's lawyer, Kenneth Edgar, was not returned yesterday.