Grasso Opens the Door

After two weeks of sitting through depositions of the men who forced him out as head of the New York Stock Exchange, Richard Grasso says he's "feeling pretty good" about the high-profile case brought by former friend and current nemesis, New York Attorney General Eliot Spitzer.

In case you haven't heard, Spitzer has filed a civil suit against Grasso to get him to return a chunk of his $140 million pay package to the NYSE, using the state's once obscure not-for-profit law, which says entities like the NYSE must pay their top executives in a "reasonable" manner. In recent weeks, Grasso appeared at depositions for two former board members, Goldman Sachs CEO Hank Paulson, and the chairman and CEO of JP Morgan Chase, William Harrison. Much of the discussions involved the mundane details of Grasso's pay package, but Paulson, for one, raised some eyebrows with his particularly frank description of Goldman's controversial investment in Archipelago, the online trading company recently purchased by the New York Stock Exchange.

Paulson, Goldman Sachs and the NYSE have come under intense criticism for the deal. Paulson, after all, led the charge to oust Grasso once the dimensions of his package were revealed. And his former No. 2 at Goldman Sachs, John Thain, now runs the exchange and engineered the deal to buy Archipelago, an electronic-trading company in which Goldman holds a 15 percent interest. The merger must be approved by the NYSE's 1,366 "seat holders," who are the technical owners of the exchange.

During Paulson's deposition, reviewed by NEWSWEEK, Grasso's lawyers presented him with internal Goldman Sachs documents showing how for years the firm wanted to use Archipelago to compete with the stock exchange's specialist system, where human traders, rather than a computer, match buyers and sellers of stocks. Paulson conceded that he and Grasso had for some time butted heads over implementing more computerized trading on the floor, which would have minimized the role of the specialists and will be one of the side effects of the current deal on the table now that Grasso is gone.

Also revealed during Paulson's deposition: Goldman Sachs was in the market to buy NYSE seats at depressed price levels before the NYSE-Archipelago deal was announced in April 2005 and the value of the seats began to soar (Paulson said he was unaware of the move to buy more seats.) Once the deal is completed, Goldman Sachs will be the single largest shareholder of the new publicly traded NYSE, thanks to its seat ownership and stake in Archipelago. Goldman Sachs, according to one document presented during the deposition, will realize a profit of more than $200 million.

But in his deposition, Paulson sought to minimize how much the Archipelago deal would benefit Goldman Sachs. Even though Goldman Sachs was the investment banker on the deal, Paulson said "he thought very little of it," because "there are literally hundreds of preliminary discussions all the time that don't lead anywhere." As for the $200 million profit, Paulson called Goldman Sachs's investment in Archipelago "a pimple on Goldman Sachs," which had earnings of billions of dollars last year. A Goldman spokesman had no comment.

Grasso, for his part, isn't downplaying much about the case--especially not how much he wants to set the record straight about his NYSE compensation. In an interview with NEWSWEEK, he says that he's "prepared to go to court" with Spitzer, and that he "will never give money back" unless, of course, he is compelled to do so by the courts, which barring a settlement, will hear the case next summer.

But despite the tough talk, Grasso has opened the door to talks with Spitzer. In the NEWSWEEK interview, he reveals one term that might be enticing enough for him to agree to a deal. "First I want to make it clear I will never give money back," he says, adding that he believes the NYSE still owes him another $57 million as part of his contract. "I want the $57 million to be paid to the charity of my choice, specifically, a large portion of it will be given to a handful of universities with very expensive tuitions earmarked solely to be used to fund the educations of the children of police, firemen and construction workers."

Grasso's attempt at instigating a little class warfare adds a new twist to a controversial case that has taken several confusing turns since it burst onto the headlines more than two years ago. When Grasso took his $140 million pay package in the summer of 2003, he became the poster child of excessive pay among Wall Street's ruling elite. (Grasso, after all, was not just making a lot of money, but in his role as head of the exchange, he was also regulating many of the firms whose CEOs were paying him the big bucks.)

But as more facts became known, the entire matter became less about greed than about accusations of incompetence, particularly among some board members who became Grasso's biggest critics when they forced him to resign later that year. First, much of the board eagerly voted for the pay deals that made Grasso one of Wall Street's highest paid people, primarily because they thought he did a great job during his many years at the exchange--an undeniable fact even by his critics as Grasso helped propel the size and stature of the NYSE. Those that wanted him out, like Goldman Sachs's Paulson, readily admitted in a recent deposition that he skipped meetings where Grasso's pay was discussed and didn't act on memos sent to him by NYSE's compensation committee.

Spitzer got into the act in early 2004, launching one of many investigations that have scared the daylights out of Wall Street in recent years, this one under the state's not-for-profit law. For months, Spitzer claims, he tried to settle the case, reaching out to Grasso through various friends and associates. But Grasso tells NEWSWEEK Spitzer never once called his lawyer, Brendan Sullivan, to discuss a settlement. By the spring of last year, Spitzer made his move, filing a civil case against Grasso, and only one NYSE board member, Ken Langone, the former head of the compensation committee, saying Grasso violated the not-for-profit law by accepting too much compensation, while Langone misled the board on an $18 million chunk of it.

Other Wall Street targets have folded quickly under threat of a Spitzer investigation, but not Langone and Grasso. Langone, a billionaire financier and cofounder of Home Depot, has attacked Spitzer any way he can, in op-ed articles, in meetings with businessmen that Spitzer needs to finance his run for New York State governor in 2006 and in person. (Last year, Spitzer tried to make friends with Langone, who said "not likely.") Spitzer is the front runner in the New York governor's race so far, but Langone, who lives in the state, has been using his expansive Rolodex to find a Democratic challenger to run against Spitzer in the primary and a Republican during the general election.

How worried is Spitzer about Langone? Well, when I recently called a Spitzer aide about Langone, he volunteered an interesting fact: Langone has already given $35,000 to one potential primary opponent, Thomas Suozzi, the Nassau County executive, who has been toying with a run for the governor. When I ran this by Langone's office, they set record straight: Not only did he give $35,000 to Suozzi, but Langone's wife gave $44,500 as well.

Langone also didn't dispel talk that he's planning an even bigger blitz against the attorney general. According to one prominent New York businessman, Langone recently approached him for help raising $25 million for ads criticizing Spitzer. "I'm not going to comment on that," Langone said when asked about the incident, "but you can say I've spoken my mind about how I feel at being accused of misleading people [and] that I could make the point to the citizens of New York that Eliot Spitzer isn't worthy of the public trust." (Spitzer declined to comment.)

Grasso, meanwhile, has recently made statements that seem to suggest he's open to a settlement. He has been showing up frequently for depositions in the case--including one session in Spitzer's office. His foray into what might be considered enemy territory prompted Spitzer's lead attorney, Avi Schick, to approach Grasso's attorney about possible deal discussions. Then in a recent CNBC television interview, Grasso said: "To the extent we could find a path that is mutually beneficial ... I think this would be in everyone's best interest." He later distanced himself from that statement, and in his interview with NEWSWEEK this week, he distanced himself even further: "All I was trying to say was you never say never," Grasso says. "There are no settlement discussions, and settlement to me means the $57 million they owe me is all paid to the charity of my choice."