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Hubris v. Excess: Eliot Spitzer and the NYSE Square off Against Richard Grasso

In one of the more interesting earnings reports you’ll see, the New York Stock Exchange yesterday said that its net income fell 54% in the second quarter — with the primary culprit being costs stemming from ongoing litigation with ousted former chairman Richard Grasso.

In one of the more interesting earnings reports you’ll see, the New York Stock Exchange yesterday said that its net income fell 54% in the second quarter — with the primary culprit being costs stemming from ongoing litigation with ousted former chairman Richard Grasso.

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The exchange reported that it spent more than $20 million on legal fees through the first two quarters of 2004, or $14 million more than it typically spends in an entire year. Most of this has been incurred since current NYSE Chairman John Reed enlisted New York State Attorney General Eliot Spitzer to pressure Grasso into returning over $100 million of his now infamous $188 million pay package. Grasso has said he’ll fork over $48 million if the NYSE board apologizes for defaming him. Barring that, he has filed a countersuit claiming that the exchange still owes him another $50 million. All parties seem to be digging in for a long battle.

Which doesn’t seem to be a good thing for the NYSE. When the scandal broke last year, the board’s housecleaning plan was to show Grasso the door. Now it is trying to use Spitzer to mop up. But by continuing its efforts to make a public example of Grasso, the NYSE has embarked on a protracted legal war whose costs may soon exceed the amount the Big Board is seeking in return, and it might never see a dime.

It’s not easy to pick sides here. Grasso by most accounts did a fine job as head of the exchange. But the NYSE’s regulatory role gave him sway over the very directors responsible for setting his compensation. According to Spitzer’s lawsuit, Grasso’s pay from 2000 to 2002 represented 99 percent of NYSE net income. It’s hard to accept that this was a fair arrangement in the best interest of the organization.

But it’s also hard find sympathy for the NYSE board, composed of top executives from the financial world who somehow claim to have been in the dark about Grasso’s pay.

Spitzer, meanwhile, has turned the New York State Attorney General’s office into the arbiter of American corporate ethics, and continues to dust off arcane state laws that bring Wall Street under his jurisdiction. He is widely presumed to be eyeing the governor’s office, with much help from publicity arising out of his prosecutorial crusades.

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But Spitzer has so far succeeded mostly in getting the targets of his investigations to settle. Grasso is making it clear that he plans to fight, and he could make for a very tough opponent. His name has already been dragged through the mud, and he has little to lose through further publicity. Now he seeks vindication, but the next best thing would be to drag Spitzer (and perhaps a few NYSE board members) down with him.

In this case, Spitzer is vulnerable on a couple of fronts. One of his main assertions — that the board was misled about Grasso’s pay — is refuted by an emerging paper trail, to say nothing of a certain common sense. His suit also conspicuously avoids taking aim at Carl McCall, a prominent board member during the Grasso years and a key New York State Democrat who could be instrumental to Spitzer’s political ambitions.

The past few years have given us more than our share of corporate courtroom battles. But those bouts may have just been the undercard. If Spitzer-Grasso stays on track and reaches trial in 2005, it promises to be the heavyweight fight of the year, and at this point it looks too close to call. While it’s sure to produce its share of black eyes, it’s hard to imagine anyone emerging a winner.