40 Million Dollar Judge Reversed Again in Grasso Case

Grasso Case 'Over' After Panel Throws Out Last State Claims
The New York Law Journal by Noeleen G. Walder - July 1, 2008

An appeals court yesterday threw out the last state claims against Richard A. Grasso, the former New York Stock Exchange chairman, clearing the way for Mr. Grasso to keep his hotly contested $187.5 million compensation package. "We have reviewed the Court's opinion and determined that an appeal would not be warranted," Alex Detrick, press secretary for Attorney General Andrew M. Cuomo, said in an e-mailed statement yesterday. "Thus, for all intents and purposes, the Grasso case is over." Earlier, the Appellate Division, First Department, held in a 3-1 decision that the exchange's conversion to a for-profit corporation extinguished the attorney general's authority to prosecute an action brought in 2004 against Mr. Grasso based on alleged violations of the Not-for-Profit Corporation Law.

The majority's decision in People v. Grasso, 82, dismissed the two fault-based statutory claims that remained against Mr. Grasso in the wake of a unanimous Court of Appeal's ruling last week. The Court held that then-Attorney General Eliot Spitzer did not have the power to bring four other claims against Mr. Grasso based on the attorney general's common law power to defend the rights of those who are unable to protect themselves (NYLJ, June 25). Yesterday's ruling reversed a 2006 decision by Manhattan Supreme Court Justice Charles E. Ramos that would have permitted Mr. Cuomo to recoup as much as $112 million from Mr. Grasso for the benefit of the exchange. Writing for the majority, Justice James M. McGuire concluded that it would "serve no legitimate public interest" for the attorney general to receive money that would then go to the exchange's successor, New York Stock Exchange LLC, which would in turn "have an unrestricted right to do with it as it pleased - including . . . transferring it to its for-profit owner, NYSE Group, so that the latter could pay every dollar of its dividends to its shareholders." The panel also held that the attorney general could not maintain a breach of fiduciary duty claim against the former chair of the exchange's compensation committee, Kenneth G. Langone. In a dissent, Justice Angela M. Mazzarelli wrote that the majority's decision "would open the door to a feeding frenzy for con men and swindlers to raid assets of not-for-profit corporations they control and then evade prosecution and responsibility by merging with a for-profit corporation."

The attorney general's suit against Mr. Grasso came in the wake of increasing public scrutiny over the former chairman's allegedly excessive compensation during his tenure at the exchange. Mr. Grasso's base salary from 1995 to 2002 was roughly $1.4 million, with bonuses that escalated from $900,000 in 1995 to $10.6 million in 2002. His 2003 agreement provided a lump sum of $139.5 million and an additional $48 million over four years. The negative reaction to the package forced Mr. Grasso to resign in 2003. The following year, the state filed suit, alleging that his "unreasonable" compensation violated the not-for-profit law. In addition to the four common-law claims thrown out by the Court of Appeals last week, the attorney general brought two statutory fault-based claims against Mr. Grasso alleging unlawful transfer of assets and breach of fiduciary duty. The action also maintained that Mr. Langone breached his fiduciary duty when he misled the exchange's board of directors about the amount of Mr. Grasso's compensation. Each of the three statutory causes of action sought to recover money on behalf of the exchange, a reported more than $112 million in Mr. Grasso's case. In March 2006, the stock exchange gave up its not-for-profit status when it completed a series of mergers into NYSE LLC, a for-profit entity owned by a for-profit corporation, NYSE Group. On Oct. 18, 2006, in People v. Grasso, 831 NYS2d 349, Justice Ramos granted partial summary judgement in favor of the state on the statutory claims. The judge held that Mr. Grasso breached his fiduciary duty to keep the board apprised of the "magnitude" of his supplemental retirement fund benefits, which ballooned from $39 million to $100 million over a three-year period. Justice Ramos also denied Mr. Grasso's and Mr. Langone's motions to dismiss the statutory claims against them.

'Lapsed' Authority

Yesterday, the First Department majority held Justice Ramos "erred in concluding that the Attorney General's authority to maintain these causes of action against Grasso and Langone was unaffected by the conversion of the Exchange into a for-profit entity." While the attorney general "unquestionably" had the power to bring each of these causes of action under §720(b) of the not-for-profit law, his authority to prosecute the claims "lapsed" with the merger of the exchange into a for-profit corporation, Justice McGuire wrote. Even though Business Corporation Law 906(b)(3) allows pending actions to go forward as if a merger or consolidation had not occurred, "it does not follow - as the Attorney General and dissent assume - that the Attorney General continues to have authority or standing to prosecute them," he added. Justice McGuire noted that the "evident purpose of N-PCL 720 in granting limited authority to the Attorney General to bring certain actions on behalf of a not-for-profit corporations is to vindicate the public interest in the management and affairs of not-for profit corporations." But in the wake of the exchange's conversion to a for-profit entity, allowing the suit to go forward would "vindicate only the interests of private parties, not any public interest," Justice McGuire wrote.

And while the parties failed to discuss Article VII, §8(1) of the state Constitution, which prohibits giving or loaning the state's money "to or in aid of any private corporation," permitting the attorney general to use public funds to prosecute "causes of action on behalf of an entity that is no longer a not-for-profit corporation and seeks only a money judgment that would benefit the owners of the for-profit entity" raises "serious constitutional questions," the panel said. In her partial dissent, Justice Mazzarelli disagreed with the majority's finding that the attorney general no longer possessed the power to pursue the action. To interpret §720(b) as extinguishing the attorney general's power to bring a claim when an entity merges into a for-profit corporation "would wrest control of prosecutions against not-for-profit corporations from the Attorney General and deliver that control squarely into the hands of those accused of wrongdoing," she said. Justice Mazzarelli also disagreed with the majority that the case was "merely about recouping an excessive amount of compensation."

"While that is the immediate remedy sought," the "gravamen" of the suit is to "restore the integrity" of the exchange in the eyes of the "investing public," she wrote. Justices David B. Saxe and John T. Buckley joined the majority. The panel heard arguments on Jan. 10, 2007. Gerson A. Zweifach of Williams & Connolly, who represented Mr. Grasso, said his client was "gratified" by the ruling. "His devotion to the Stock Exchange never wavered, and neither did his faith that he would be vindicated by the courts," Mr. Zweifach added. Mark C. Zauderer and Jonathan D. Lupkin of Flemming Zulack Williamson Zauderer served as co-counsel to Mr. Grasso. Mr. Zauderer declined to comment. Gary P. Naftalis of Kramer Levin Naftalis & Frankel, who served as counsel to Mr. Langone, said his client is "pleased" by the ruling and "gratified" by the attorney general's decision not to pursue an appeal. "We always believed that this was a case that should never have been brought," Mr. Naftalis said. Avi Schick, David Axinn, Jeffrey P. Metzler, and Robert Pigott handled the appeal for the attorney general. Adam J. Schlatner of Winston & Strawn represented the exchange. - Noeleen G. Walder can be reached at nwalder@alm.com.