The Grasso decision

NY Supreme Court Justice Ramos summarily held former NYSE CEO Richard Grasso potentially liable to return at least tens of millions of dollars of his supplemental pension payments.  The court rejected Grasso's arguments that the board had the facts as of 2001, Grasso didn’t know what the board knew, Grasso didn’t know the exact amount in the account at an earlier date, and Grasso accepted the payments pursuant to his contract in good faith.

Here’s some excerpts from the opinion:

The Attorney General [argues] that the inadvertent knowledge the Board may have achieved that Mr. Grasso relies upon is irrelevant because the SERP balance should have been disclosed by Mr. Grasso, and sooner than February 2001. This Court agrees. * * *

This C o u r t must agree with Mr. Grasso that it is impossible for the Court to determine on this motion what Mr. Grasso actually knew about what the Board members knew. But summary judgment is not granted on the basis of his actual knowledge. Mr. Grasso’s duty is to be f u l l y informed and to see to it that t h e Board was f u l l y informed. He failed in this duty. * * *

[In response to Grasso’s argument that he did not know the amount in the account until 2002 when it exceeded 100 million] [t]his Court * * * finds this affirmative defense of neglect to be shocking. That a fiduciary of any institution, profit or not for- profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care. * * *

As a last resort, Mr. Grasso argues that t h e SERP payments were legal obligations of the NYSE which he accepted in good faith. * * * "It is well established that directors and officers of a corporation are fiduciaries, and their good faith or innocent motives . . . is [sic] no defense to liabilities founded upon breaches of fiduciary obligations. [citation omitted]

In other words, according to the court, an executive cannot, as a matter of law, accept a payment from his corporation pursuant to his employment contract unless he makes an affirmative effort to ensure that the board knows all the facts, even if he acts in good faith.

Note that the obligations the court imposes are based on Grasso’s role as a director as well as an executive. So the court’s reasoning would not apply to Ovitz in the Disney case because he wasn’t a director. Interestingly, it is questionable whether Grasso could sit as a director on his own compensation, which raises a question of the role his director position should play here.

At least on initial analysis (and I have not analyzed the bulk of the opinion dealing with other issues) this is a shocking decision. And it is hard to avoid the suspicion of political motivation in Justice Ramos’ decision to issue a summary judgment before the election rather than waiting for a full trial on fact-intensive issues like what the board knew and Grasso's good faith.

Comments

[M. Hodak]

I read the Webb report upon which this decision is based. I'll leave the law to the law profs, but the determination of "reasonableness" based upon the opinion of three compensation consultants seems bizarre. It's a little ironic that Frederick Cook, one of the three consultants used in this report was also in the same week the NYT poster boy of "outrageous CEO comp." Surely Mr. Cook should know that lots of compensation decisions that might have made sense a priori can look "unreasonable" after the fact. My guess is that he did know this, but was never asked by Webb. Another irony is that Brian Foley, (aka Morgenson's lap dog), turned out to provide the most generous assessment of what Grasso "deserved," though still far below what the board thought he deserved. So much for business judgment.