Wall Street Journal Online

Court Overturns Ruling That Grasso Must Return Part of Compensation

by CHAD BRAY
July 1, 2008

NEW YORK -- A state appeals court on Tuesday dealt a potentially devastating blow to the New York attorney general's efforts to force ex-New York Stock Exchange Chairman Richard Grasso to return a portion of his $187.5 million compensation package.

New York Attorney General Andrew Cuomo issued a statement saying he is not pursuing appeal in the case. More details on his statement are expected shortly.

In a 3-1 decision, the New York Supreme Court's Appellate Division dismissed the two remaining
causes of actions against Mr. Grasso and one against former NYSE director Ken Langone, saying
New York Attorney General Andrew Cuomo can no longer pursue the claims under the state's
not-for-profit law since the NYSE has become a for-profit company, NYSE Euronext Inc.

The "Supreme Court erred in concluding that the attorney general's authority to maintain these causes of action against Grasso and Langone was unaffected by the conversion of the exchange into a for-profit entity," Appellate Division Justice James M. McGuire wrote for the majority.

The intermediate appeals court also threw out a partial summary judgment decision by New York Supreme Court Justice Charles E. Ramos in 2006 that Grasso must return a portion of his pay.
The decision was the second major setback in a week for the state attorney general's office as it attempts to force Mr. Grasso to return more than $112 million.

Last week the New York Court of Appeals, the state's highest court, upheld a 3-2 appellate division decision from May 2007 that the attorney general's office didn't have the authority to
pursue four of six causes of action against Mr. Grasso.
The case was brought by Mr. Cuomo's predecessor, former New York Attorney General Eliot Spitzer, in 2004, alleging Mr. Grasso's pay was excessive for a not-for-profit company.

Mr. Spitzer stepped down as New York's governor in March amid pressure following revelations
that he was a client of a high-end prostitution ring.Mr. Grasso, who left the NYSE in 2003 amid turmoil over his pay, has denied wrongdoing.

Gerson Zweifach, a lawyer for Mr. Grasso, didn't immediately have a comment when reached
Tuesday. Mark Zauderer, Mr. Grasso's co-counsel, declined comment. "We are very gratified with the court's decision dismissing the case completely as to Mr. Langone," said Gary Naftalis, Mr. Langone's lawyer. "We always believed that this was a case that should have never been brought."

Michael W. Peregrine, a lawyer at McDermott Will & Emery LLP in Chicago, said the case has
been closely watched by the nonprofit community because it provided a window into how a state
attorney general would pursue excessive compensation claims against a not-for-profit hospital,
museum or university.

The decision "doesn't resolve the fundamental issues the attorney general's case raised," Mr.
Peregrine said. "What is unreasonable compensation? What is appropriate? What is the role of the executive compensation chair."

However, Mr. Peregrine said the average hospital or museum doesn't have the option to convert
into a for-profit entity. "It's an incomplete decision from a nonprofit perspective," Mr. Peregrine said. "We're not going to have real closure on the merits. Having closure on merits would have provided some guidance to volunteer directors."

In the majority opinion, the appellate division found that "public policy concerns" supporting the
attorney general's right to bring a case under the state's not-for-profit laws no longer exist
following the Big Board's conversion to a for-profit entity, particularly because the only relief he
is seeking is monetary. "The prosecution of such a cause of action would vindicate only the interests of private parties, not any public interest," Justice McGuire wrote.

The court also noted no one charged with misconduct or neglect in the attorney general's case had the power to convert the exchange to a for-profit company. The NYSE went public in 2006 and merged with Euronext in 2007 -- well after Grasso left the exchange.

The right of recovery lies with the Big Board's successor company -- the for-profit NYSE LLC,
the court found. "With the conversion of the exchange into a for-profit entity, NYSE LLC and its for-profit direct and indirect owners -- NYSE Group and its shareholders -- unquestionably have powerful financial incentives to prosecute an action on behalf of the exchange or its successor, NYSE LLC, seeking recovery of tens of millions of dollars," Justice McGuire wrote.

In a partial dissenting opinion, Appellate Division Justice Angela M. Mazzarelli wrote the
attorney general's office should be allowed to pursue claims against Messrs. Grasso and Langone
under the state's not-for-profit law on behalf of the Big Board's not-for-profit regulatory arm,
NYSE Regulation Inc.

However, the judge said in her dissent that the claims by the attorney general should survive, even if there was no not-for-profit entity following a merger.

The judge said construing the not-for-profit law so that the attorney general couldn't pursue a
claim against a company after it converted to a for-profit entity would lead to the "absurd result"
that the attorney general only has standing to bring a case if the entity remains not-for-profit
throughout the litigation.

The judge also said there was no evidence the state Legislature intended for the law to be
construed that way. "This would diminish [the attorney general's] ability to execute his mission and would encourage changes in status simply to evade his reach," Justice Mazzarelli wrote. "Indeed, it would wrest control of prosecutions against not-for-profit corporations from the attorney general and deliver that control squarely into the hands of those accused of wrongdoing."