The New York Times describes the background for the lawsuit:

The lawsuit sets the stage for what could be a dramatic trial, with powerful heads of Wall Street firms who served on the exchange's board likely to be put in the uncomfortable position of having to testify publicly about how they came to approve a compensation package that some of them later disavowed.

The 52-page complaint filed in New York State Supreme Court by Mr. Spitzer paints a harsh picture of Mr. Grasso, citing new evidence for contending that he inflated his pay and deliberately misled his high-powered board about many details of his package to enhance his pay above and beyond a benchmark of comparable chief executives.

Although the other board members of the exchange voted for Mr. Grasso's pay package, the suit is narrow in focus, naming only one other defendant - a former director, Kenneth G. Langone, who is a friend of Mr. Grasso and was the chairman of the compensation committee from June 1999 to June 2003, the years when Mr. Grasso's annual pay peaked.

Mr. Grasso, who has vociferously defended his pay as fair given the success of the exchange during his tenure as chairman from 1995 until he was forced out last fall, said in a statement: "I'm disappointed that New York's attorney general has chosen to intervene in what amounts to a commercial dispute between my former employer and me. I look forward to a complete vindication in court."

In what could help his case against Mr. Grasso, Mr. Spitzer also disclosed that Frank Z. Ashen, the internal compensation expert at the Big Board, had decided to cooperate with authorities, agreeing to pay back $1.3 million of compensation he received. Among the new evidence presented yesterday was a statement from Mr. Ashen, a 25-year employee at the exchange, that Mr. Grasso did not disclose to the board $18 million of bonus payments. Mr. Spitzer said that the cooperation of Mr. Ashen, who originally was going to be named as a defendant in the suit, was crucial in putting the case together... (see article for more)
------------------------------------------------------------------------------------------------------------
New York POST
GRASSO THE SNAKE
By PAUL THARP (May 25, 2004)

May 25, 2004 --Dick Grasso was more underhanded than many suspected - using spies, doctored records, rigged votes and intimidation to suck almost every penny of profit at the New York Stock Exchange, crusading New York Attorney General Eliot Spitzer charged yesterday.
Spitzer outlined a pattern of greed, bullying and conflicts of interest in a four-year secret plan by Grasso to award himself more than $187.5 million as he prepared to retire from the NYSE.

Spitzer said Grasso's "unsavory, self-dealing and fraudulent" acts were especially troubling because they are a "template of a much larger problem throughout the corporate structure that must be confronted."

Spitzer filed a suit seeking to reclaim for the NYSE as much as $120 million of Grasso's controversial first payment of $139 million in compensation. Grasso said he would fight the suit and was "disappointed" Spitzer intervened in "what amounts to be a commercial dispute between my former employer and me. I look forward to complete vindication in court."

Spitzer's lawsuit and exhibits implied that Grasso personally shot down early attempts to crack down on Wall Street firms' use of phony analyst research - just to win support for his big paychecks. Wall Street execs most vulnerable over research also sat on NYSE boards that approved more than $30 million of Grasso's disputed pay.

Grasso held "enormous power" over the compensation committee members, picking them himself, and on occasion even confronted panel members who wouldn't buckle under to Grasso's straw boss on the pay panel, investor Ken Langone. Spitzer wants Langone to fork over at least $18 million in disputed Grasso pay that Langone allegedly pushed through the board for approval.

Langone denied all Spitzer's allegations yesterday, saying he never misled anyone and that all pay data was "honestly and professionally prepared."

Spitzer told a news conference that Grasso's influence-peddling included making a personal phone call to NASD chief Robert Glauber to urge him to drop Langone from an NASD probe of Langone and his investment bank, Invemed.

The NASD said Spitzer's claims about the phone call "were extremely misleading." "Not a single word in the complaint was changed as a result of the call or after the call was received," the NASD said in a statement. Langone already had been dropped from the suit prior to Grasso's call, the NASD said.

Grasso had spies and ears everywhere. One compensation committee member, who balked in a private panel meeting at some of Grasso's excessive 2000 pay, says he was stunned that Grasso confronted him so quickly. The director said he "was a little taken aback that there was an ear to the committees . . . and that my hesitancy was reported immediately."

The director said he wound up approving the questionable pay out of fear of reprisal. He told investigators, "Thank God, I escaped that one. This man was also our regulator, and I'm a member of the [NYSE] . . . And when he's kind of indirectly your supervisor or your regulator, you have to be careful."

Grasso also let it be known he could fix problems for companies that had chiefs sitting on the compensation committee.

When Merrill Lynch had difficulty with a NYSE panel that had blocked the bank's planned sale of its specialist unit, a firm executive complained directly to Grasso.

Grasso also kept what amounted to a friends-and-enemies list. Bear Stearns chief Jimmy Cayne told investigators his specialist division head had urged him for years to join the NYSE board because the Bear Stearns division "would get better treatment from the NYSE if Cayne were a member of the board."
----------------------------------------------------------------------------------------------------------------
The Complaint starts off:

PRELIMINARY STATEMENT

1. This action is brought to enforce the public's interest in effectuating the principle, articulated in New York's Not-For-Profit Corporation Law, that officers of Not-For-Profit corporationsbe paid only that compensation that is "reasonable" and "commensurate with the services performed." The New York Stock Exchange's awards of compensation and benefits to defendant Richard A. Grasso violates this principle because they were: (i) objectively unreasonable; (ii) the product of a process that permitted Grasso improperly to influence both the amounts awarded to him and the members of the New York Stock Exchange Compensation Committee and Board of Directors who were required to approve those awards; and (iii) approved by the NYSE Board of Directors based upon materially incomplete, inaccurate and misleading information.
-------------------------------------------------------------------------------------------------------------------
UPDATE:
AP Newswire May 25, 2004 reports that Grasso is countersuing the New York Stock Exchange for the $48 million he did not receive out of his $187.5 million compensation package, and will fight Elliott Spitzer's lawsuit:

Ex-NYSE Chief to Fight Lawsuit, Countersue
By MICHAEL J. MARTINEZ AP Business Writer

NEW YORK (AP) - Gearing up for a fight, former New York Stock Exchange chairman and chief executive Richard A. Grasso said Tuesday he would not only fight the state attorney general's lawsuit over his $187.5 million compensation package, but would countersue the exchange for $48 million of that money that he never received.

In an op-ed piece published Tuesday in The Wall Street Journal, Grasso said any damages awarded in his countersuit would be donated to charity. Grasso will also seek damages from the NYSE and interim chairman John Reed for "the (media) leaks orchestrated by Mr. Reed."

"I will derive considerable pleasure knowing that some public good ultimately resulted because of the immoral and dishonest behavior of those who forced my departure and besmirched my name," Grasso wrote in the Journal. "Those who thought they could break me with their repeated media leaks badly underestimated my character and resolve. I look forward to addressing them in court where they can no longer hide behind (attorney general Eliot) Spitzer's cloak."

Spitzer's suit, filed Monday, accuses Grasso of intentionally misleading the NYSE board of directors and compensation committee in order to cash in on an inflated compensation package. The suit also named the exchange and a former NYSE board member as defendants following a four-month investigation into Grasso's compensation. Spitzer said he expects to ask for the return of well over $100 million from Grasso; the money would go to the exchange.

Grasso resigned as chairman and CEO last September amid intense criticism of his pay.

"Reasonable people can disagree about what an executive should be paid, but the directors who evaluated my performance were well aware of the market for executive compensation on Wall Street, because that is where many of them worked and earned their own substantial income," Grasso wrote. "For all the charts and handouts at his press conference, Mr. Spitzer cited no evidence that I misled the board or hurt the NYSE. It didn't happen."

The suit asked that a State Supreme Court judge rescind the pay package and determine a reasonable level of compensation for Grasso. It names Grasso, the NYSE and Kenneth G. Langone, a former NYSE board member and ex-chairman of the exchange's compensation committee.

"This case demonstrates everything that can go wrong in setting executive compensation," Spitzer said. "The lack of proper information, the stifling of internal debate, the failure of board members to conduct proper inquiry and the unabashed pursuit of personal gain resulted in a wholly inappropriate and illegal compensation package."

Spitzer maintained that Grasso, Langone and former NYSE human resources executive Frank Ashen misled compensation committee members by omitting retirement accounts and other aspects of Grasso's pay package. The attorney general said he singled out Grasso and Langone because they allegedly actively misled the other board members, although the entire board could have been held responsible for approving the compensation.

"I think certainly that the other board members regret their behavior and wish they had been more diligent after allowing themselves to be misled," Spitzer said. "I drew the line based on those who misled and those who were misled."

Spitzer claimed the exchange's directors were given inaccurate and misleading information before approving Grasso's contract, and that certain deferred compensation plans and benefits were entirely left out of documents given board members.

He also cited testimony from an unidentified director and compensation committee member, whose firm answered to Grasso in exchange business, and who said he was asked to meet with Grasso in 2001 after privately expressing concern over the extent of his 2000 pay. Spitzer claimed Grasso cowed the director into approving the compensation package.

The attorney general also claimed Grasso's payment formula was "inappropriately driven by a comparison with the salaries of top executives in the world's largest corporations." Spitzer noted that after Grasso allegedly failed to address the issue of analysts' research integrity in 2001, he had to rate his own performance on regulatory issues, on a scale of 1 to 10, for his annual compensation package.

"He gave himself a 13," the attorney general said.

Langone defended Grasso and the board's actions in a statement. "These were honest, diligent and sound compensation decisions that were thoroughly researched and, most importantly, supported by 100 percent of the board," Langone said. "We all had access to that same information, beginning, middle and end and that's why singling people out in this case is so obviously misguided."

Langone, who headed the board's compensation committee from 2000 to 2003, is considered a close friend and confidante of Grasso, and was instrumental in getting board approval for his compensation package. Spitzer was seeking $18 million from Langone, the amount of money the attorney general said Langone misled the board about.

Both men are directors of The Home Depot Inc., and Langone is a co-founder of the home improvement retailer. Grasso has opted not to run again for the company's board at its annual meeting on Thursday.

Ray Pellecchia, an NYSE spokesman, said, "We are supportive of Attorney General Spitzer's efforts in this matter. As a named party it would be inappropriate to comment further."

Spitzer said he might seek injunctive relief against the exchange, which would effectively prohibit the NYSE from excessive compensation of its executives in the future. Any portion of Grasso's compensation that Spitzer recovers, along with damages won from Langone, would be returned to the NYSE.

Spitzer also announced he had reached a settlement with Ashen and Mercer Human Resource Consulting, Inc., a consultancy that prepared a financial analysis of the pay package. Spitzer said Ashen and Mercer "admitted providing information to the board that was inaccurate and incomplete."

Under the settlement, Ashen, a top aide to Grasso, will return $1.3 million to the exchange, and Mercer will return the fees it charged the NYSE in 2003, totaling $440,275, Spitzer said.

Ashen and Mercer have already given Spitzer testimony about Grasso's compensation and their role in providing misleading information to the board. Mercer had no immediate comment.

Bruce Yannett, Ashen's attorney, said the former executive, who retired from the NYSE last year, was happy to put the matter behind him.

"Mr. Ashen recognizes in hindsight that certain mistakes were made, but at no time did he intentionally provide inaccurate or incomplete information to the Board of Directors," Yannett said in a statement.

Mercer said in a statement it settled the case "solely to put this matter behind us and to avoid the cost and distraction of protracted negotiation." The company said it did not make recommendations regarding the structure or amount of payment of Grasso's compensation package, and that it reported solely to Ashen.

Grasso resigned as chairman and CEO as the controversy surrounding his pay reached its peak. He has received $139 million of his compensation package, and recently told Newsweek he would forgo the rest if the exchange would apologize for tarnishing his name.

The NYSE, for its part, has already asserted that Grasso should return the bulk of his compensation. In February, interim NYSE chairman John Reed wrote to Grasso's lawyer, demanding the return of $120 million; Grasso refused.

Spitzer filed his suit under New York's Not-for-Profit Corporation Law. His investigation is separate from a probe of Grasso's compensation by the Securities and Exchange Commission, which is considering whether there was a violation of federal securities laws or the NYSE's bylaws.

Matt Well, an SEC spokesman, said Monday, "At this point we don't have a timeline" for the commission's investigation.

On the Net:

www.nyse.com

Spitzer's Web site: www.oag.state.ny.us

2004-05-25 13:27:09 GMT