Spitzer's white elephant

Three years ago then AG Eliot Spitzer sued Richard Grasso to recover allegedly excessive pay, oddly without suing the board that granted the pay. Holman Jenkins, in a memorable column I discussed at the time said:

[Spitzer's] political ambition is zeppelin-like, lurching over Manhattan in unmoored, alarming fashion. He was obviously eager here to limit his political risk by portraying the NYSE's famous board as victims rather than culprits in the Grasso pay scandal.

Today, New York appellate court threw out counts claiming that Spitzer had the power to complain that Grasso's pay was unreasonably high. Now Spitzer's successor has to prove that the pay was illegal and that Grasso knew he was wrong to accept it.

This will be rather difficult, because in depositions in the case reported by the WSJ's Kimberley Strassel, and discussed here, board members provided

reasonable explanations for their decisions. . . . They all praised Mr. Grasso, believing the Big Board could not afford to lose him and it was important to pay him well. . . .

The case will continue, for now.  But it likely will be recognized as the bald-faced political gambit that it was.

Comments

[Sam E. Antar (former Crazy Eddie CFO & convicted felon)]

As long as Mr. Grasso obtained his compensation free of fraud and misrepresentation, he is entitled to such compensation, even if people believe that he is over-compensated.

If he was over-compensated (free of any fraud by him), we must focus on the persons, processes, and procedures that enabled him to receive excessive compensation.

Absent any fraud, it is a “business judgment” issue involving the board, who was responsible for approving his compensation.

Mr. Grasso has every right to obtain the maximum possible compensation he can get, as long as no fraud and misrepresentation is involved.

If the process was flawed or the board made erroneous judgments (free of any misleading or fraudulent information) in granting Mr. Grasso's compensation, he may be demonized by others as “greedy” but that hardly would give rise to him being a criminal.

Furthermore, absent any fraud, he may be entitled to his “excessive” compensation, even if the persons who approved it did not exercise their “best” judgment, no matter how flawed their decision was.

You have a right to be greedy, so long as you do not break any laws.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

[Matt Bodie]

It's not a Court of Appeals decision. It's a decision by the Appellate Division (First Department).

[ribstein]

Thanks. I made the change.

[Robert Schwartz]

The decision is only a partial victory for Mr. Grasso, and only a partial defeat for the AG.

The Appellate Division did allow the continuation of the case based on the following statutes:

NPCL § 202.

(a) Each corporation ... shall have power ... :

12) To elect or appoint officers, employees and other agents of the corporation, define their duties, fix their reasonable compensation and the reasonable compensation of directors ... Such compensation shall be commensurate with services performed.

NPCL § 515.
(a) A corporation shall not pay dividends or distribute any part of its income or profit to its ... officers. (b) A corporation may pay compensation in a reasonable amount to ... directors, or officers for services rendered, ...

NPCL § 720. Actions on behalf of the corporation. (a) An action may be brought against one or more directors or officers of a corporation to procure a judgment for the following relief: (1) To compel the defendant to account for his official conduct in the following cases: (A) The neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge. (B) The acquisition by himself, transfer to others, loss or waste of corporate assets due to any neglect of, or failure to perform, or other violation of his duties. (2) To set aside an unlawful conveyance, assignment or transfer of corporate assets, where the transferee knew of its unlawfulness ... (b) An action may be brought for the relief provided in this section ... by the attorney general, ...

I realize that there are still a lot of factual and legal issues to be resolved, including who has the burden of proving reasonableness and by what standard. But, I think Grasso has a long way to go before he is out of the woods. If I were he, I would be looking for a face saving settlement.

[M.D. Fatwa]

If Grasso were interested in a settlement, I think he would have taken one a long time ago. This is about vindication and standing up to Spitzer. However, now that Spitzer is governor, that point may be moot. On the other hand, if Cuomo were truly independent, he'd probably drop the case now. But that would be a slap in the face to Spitzer, and I doubt Cuomo has the stomach to do that.

[Robert Schwartz]

And that is why it is time for a settlement.