Grasso has been living in a state of disbelief for some time now, absorbing the surprising turn of a career that for decades only got better. When word leaked out last year that the NYSE’s blue-chip board had paid him $139.5 million in accrued salary and pension, Grasso came under relentless criticism. He became a lightning rod for Wall Street excess and favorable deals for insiders–what could justify that kind of pay for a man running a not-for-profit organization? Grasso and his supporters say he’s worth every dime for his leadership of the NYSE, particularly after 9/11. But the exchange fired him and demanded nearly $120 million back. Now Grasso’s disbelief is giving way to defiant anger, and he has promised a showdown with the man instructed to get the money back: Eliot Spitzer, the New York state attorney general.
In his first public comments since the controversy erupted, Grasso, 57, tells NEWSWEEK he wants an apology from the exchange for “destroying my reputation.” He plans to keep the entire $139.5 million, though he’s prepared to make one concession: if he gets his apology, he’ll forgo $48 million in deferred pay he says the exchange still owes him. “If I give back a dime, that’s an admission of guilt. I can’t do that,” he says. “But if they say I’m an honorable man and I did nothing wrong, it’s the end of the issue. If not, let’s go to war.”
It’s a war that’s likely to leave many on Wall Street bloodied, including Spitzer. The attorney general was handed the case by the NYSE’s new chairman, John Reed, who told him to look into how Grasso got the money and perhaps win it back under the state’s Not For Profit Corporation Law. That law requires the pay of officers and employees of nonprofits to be “reasonable” and “commensurate with services performed.” People close to the inquiry also say a suit could be filed this week or next. Now, Spitzer is apparently leaning toward a suit that does not name NYSE board members, leaving Grasso the possible lone target.
The case could complicate Spitzer’s political future, because he may still have to point a finger at former New York state comptroller H. Carl McCall, a prominent Democrat and one of New York’s top African-American leaders. McCall served as chairman of the comp committee that approved Grasso’s pay. And during the NYSE’s internal investigations, McCall said he was unaware of the full amount he had approved. That puts Spitzer, also a Democrat, in the position of possibly filing charges against someone he needs as a political ally for a run for higher office, probably governor. “If Spitzer goes after McCall, he’s toast,” says one Democratic consultant. “If he doesn’t, he looks like he’s playing politics.” Spitzer declined to comment.
Spitzer isn’t crazy about doing the NYSE and Reed’s dirty work. He has told acquaintances that Reed practically forced him to take the case. (One official in Spitzer’s office says he was “duty bound” to investigate the matter.) “He threw this on my lap,” Spitzer told former Merrill Lynch CEO David Komansky, a person with knowledge of the conversation says. Komansky has been deposed by Spitzer’s office, but the attorney general also asked him to persuade Grasso to settle. Spitzer has said he also reached out to former General Electric CEO Jack Welch and attorney Martin Lipton to work on Grasso.
Spitzer concedes that the Grasso matter doesn’t compare with his other investigations. “I would worry more about research fraud than the salary of one person,” Spitzer says. But he adds that the probe is important “if people breached their fiduciary duty.” Spitzer’s office has unearthed what one person calls “fantastic” evidence for a charge that Grasso may not have been forthcoming about his contract to board members before they approved the package. In addition, NEWSWEEK has learned that Spitzer has new evidence that Grasso may have shared sensitive information about Spitzer’s 2002 research investigation with NYSE-member firms that Grasso had regulated. Spitzer has said he’d settle if Grasso returns $50 million. Spitzer adds: “Ninety percent of all cases get settled on the courthouse steps.”
Grasso says his case falls into the other 10 percent. The past six months have been like “hell,” he says. “I’ve been living in my own private prison.” He spends most days at his home on Long Island, though he occasionally ventures out to lunch with power brokers. (While dining recently at the Regency Hotel, he was told that he had just missed Spitzer by five minutes.) He’s infuriated over how his family has been treated–reporters often stake out his favorite restaurants and his Long Island home. His daughter told him that in one of her college classes, his pay was used as an example of Wall Street greed. “That’s when I almost lost it,” he adds.
Grasso has hired attorney Brendan Sullivan, who’s famous for defending high-profile clients like Oliver North and refusing to settle. If Spitzer files his case, Grasso apparently plans to make life difficult for all the NYSE board members who approved his pay. Among them: Hank Paulson, CEO of Goldman Sachs, who led the ditch-Grasso effort; former secretary of State Madeleine Albright, another former Grasso supporter turned foe; and William Donaldson, head of the Securities and Exchange Commission, who ordered an inquiry into his pay. “This could be Wall Street’s version of that scene from the movie ‘Reservoir Dogs’ where everybody gets shot,” says a person close to Grasso.
Here’s how the script may play out: Paulson has said he was out of town in early August when the NYSE board approved Grasso’s $139.5 million and extended his contract for four years. But Grasso has told confidants he can show that Paulson was in the loop, and that once he returned from his week of bird watching, he helped Grasso develop a PR strategy to minimize the fallout. (Paulson maintains that he was against Grasso’s $139.5 million package from the outset.) Albright voted to approve his pay and extend his contract. After he agreed to give up the $48 million, the two spoke. Grasso has said Albright told him: “I know this sounds sleazy, but you’ll be with us for four more years and we’ll find a way to get the money back to you.” She denies the comment.
Grasso may also target Donaldson, his predecessor at the NYSE. The SEC chairman has been a critic of Grasso’s pay, but Donaldson was well compensated at the exchange as well. NEWSWEEK has learned that he was given a previously undisclosed retirement bonus of about $3 million when he left there in 1995, to supplement the $3 million already in his retirement account. A Grasso confidant says: “Let’s see how that $3 million fits into the New York State not-for-profit laws.” Through a spokeswoman, Donaldson had no comment.
Regardless of how this plays out, the imbroglio has ended the once close relationship between Grasso and Spitzer, who teamed up on last year’s landmark stock-research settlement. After Grasso’s contract was renewed in August, Spitzer, according to Grasso, said to him over the phone, “Congratulations, Dick. I’m happy to have the opportunity to be working with you.” Spitzer doesn’t deny the comments. Grasso is not without supporters today. “I always liked Dick and believed he was the most effective CEO the NYSE ever had,” former SEC chairman Arthur Levitt told NEWSWEEK. Right now, Grasso can use all the friends he can get.
