Grasso, Ousted by NYSE, Faces Spitzer as Big Board Goes Public
March 7 (Bloomberg) -- Richard Grasso did more than invite the wrath of Eliot Spitzer by receiving more than $140 million in pay as head of the New York Stock Exchange. The outrage over his compensation forced the 213-year-old Big Board on a course that ends today with its transformation into a public company.
Grasso, a high school graduate who worked his way up from clerk to chairman and chief executive officer of the world's biggest stock exchange, won't be there to celebrate. Lawyers for Spitzer, the New York state attorney general, will be deposing Grasso, 59, to gather evidence for a lawsuit that seeks to recover most of his pay.
Without Grasso's ouster, the NYSE might have remained a member-owned institution, reluctant to abandon the open-outcry system of floor trading. Instead, his departure paved the way for CEO John Thain, the MIT engineer and former Goldman Sachs Group Inc. president who accelerated the Big Board's push into electronic trading by acquiring Archipelago Holdings Inc.
``This has worked out to benefit the NYSE, but totally by chance,'' said John Coffee, a securities law professor at Columbia University in New York. Grasso ran the Big Board ``like a symphony orchestra, but he was pretty much committed to the stock exchange he grew up with.''
While Grasso ``would have had to be dragged kicking and screaming'' to automate the NYSE as quickly, Thain, 50, ``rushed to embrace'' the changes, Coffee said. The Archipelago purchase, which Thain announced last April, closes today.
Spitzer's lawyers will begin questioning Grasso at the Times Square offices of Heller Ehrman White & McAuliffe, a law firm not involved in the case. The attorney general is suing both Grasso and Kenneth Langone, 70, the billionaire cofounder of Home Depot Inc. and former chairman of the NYSE's compensation committee.
`Unreasonable'
The May 2004 suit claims Grasso's pay was ``unreasonable'' and violated New York law covering not-for-profit institutions. Grasso, who says he did no wrong, backs Thain's efforts to modernize the exchange.
``It's absolutely the correct thing,'' he said in an interview on March 2. ``For every leader, there's a time. My time at the stock exchange has passed.''
Under Grasso, the NYSE took steps to automate the floor, including the introduction of hand-held computers for brokers and a system that can execute trades in a fraction of a second.
Thain, who earned an MBA at Harvard University after graduating from the Massachusetts Institute of Technology, saw a need to compete more aggressively against all-electronic rivals such as Nasdaq Stock Market Inc. He stole the spotlight in April 2004, announcing the Archipelago purchase two days before Nasdaq CEO Robert Greifeld agreed to buy Instinet Group Inc.
Archipelago, Hybrid Market
The Archipelago deal thrusts the Big Board, which will be known as NYSE Group Inc., further into businesses such as options, and Thain is introducing the so-called hybrid market, a new system that will mix fully automated trading with the face- to-face haggling that has endured for more than two centuries.
``It used to be that everything we did was on the floor, now it's just a part of it,'' said Michael LaBranche, 50, chief executive of LaBranche & Co., an NYSE specialist firm founded in 1924. The NYSE ``recognizes that it's one piece of the bigger puzzle in capital markets today.''
Some floor traders say they were betrayed by the purchase and the increase in automation won't result in better stock prices for investors. White buttons pinned to their trading jackets, or smocks, proclaim in black block letters, ``I Just Don't Get It.''
While Grasso built an inner circle of fellow NYSE lifers, Thain has turned to some outsiders, such as Chief of Staff David Shuler, 43, who was hired from Goldman, and Gerald Putnam, the 47-year-old chief executive of Archipelago.
Webb Report
Grasso also styled himself an ambassador for capitalism, flying to Colombia in 1999 to meet with a top negotiator of its largest guerilla group, urging peace, and rallying investors back to the Big Board after the Sept. 11, 2001, attacks. In 2002, he helped broker Spitzer's settlement with Wall Street banks over allegations of biased research.
As chairman and CEO, Grasso was involved in the NYSE's corporate governance. He selected the exchange's pay committee, according to a report prepared for John Reed, who served as NYSE chairman from September 2003 to April 2005.
Spitzer's suit relied on the 129-page report, by lawyer Dan Webb of the Chicago law firm Winston & Strawn. Webb concluded that Grasso was overpaid by as much as $150 million and many of the exchange's directors misunderstood the terms of his pay.
After regulators criticized the Big Board for not living up to the disclosure standards set for its own listed companies, the NYSE in 2003 agreed to make public the pay for its top executives and bar them from serving as corporate directors. Grasso, for example, sat on Home Depot's board at the time.
Board Rebellion
In August 2003, a statement from the exchange revealed for the first time a $139.5 million payout to Grasso. Goldman CEO Henry Paulson, 59, led a rebellion of NYSE board members, and Grasso resigned less than a month later. Reed, 67, a former co- CEO of Citigroup Inc., was named the Big Board's interim chairman and chief executive on Sept. 21, 2003.
Grasso says he's ready for the deposition that will revisit those days.
``I look at it as a very necessary element in the trial process,'' Grasso said in the interview last week. ``Clearly they're going to focus in on my eight years as chairman, but anything is fair game.''
Spitzer declined to comment.
Five Days Possible
Michael York, an attorney for the NYSE, said he expects Grasso to be questioned by Assistant Attorney General Avi Schick; NYSE lawyer Robert Michels of Winston & Strawn; counsel for former New York Comptroller H. Carl McCall, who was chairman of the NYSE's compensation committee in 2003; and lawyers for Langone.
Grasso said the deposition probably will last four or five days.
Lawyers squabbled over whether the questioning would take place in Spitzer's office, an attorney's office or even a jury room in a New York courthouse. York said they pushed back the deposition a day and settled on neutral turf, the offices of Heller Ehrman.
Grasso's trial is scheduled to begin Oct. 30.
To contact the reporter on this story:5$G
Karen Freifeld in New York at [email protected].)jO}}
Last Updated: March 7, 2006 00:01 EST
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