People v. Grasso
| Citation | 2008 NY Slip Op 03722,858 N.Y.S.2d 23,50 A.D.3d 535 |
| Decision Date | 24 April 2008 |
| Docket Number | 9478.,M-5614. |
| Parties | THE PEOPLE OF THE STATE OF NEW YORK, by ELIOT SPITZER, as Attorney General, Respondent, v. RICHARD A. GRASSO et al., Defendants, and KENNETH G. LANGONE, Appellant. (And Other Actions.) |
| Court | New York Supreme Court — Appellate Division |
The Attorney General brought this action to challenge compensation and benefits awarded to the former CEO of the New York Stock Exchange (NYSE), Richard Grasso. A detailed discussion of the background of the litigation and the substance of the complaint is set forth in our decision in People v Grasso (42 AD3d 126 [2007]).
This appeal is from the denial of defendant Kenneth G. Langone's motion for summary judgment to dismiss the seventh cause of action. In that claim, the Attorney General alleges that defendant Langone, a NYSE director and chair of its Compensation Committee from June 1999 until May 2003, breached his fiduciary duties to the NYSE by failing to make complete and accurate disclosures of Grasso's compensation to the NYSE Board of Directors.1
In the early 1990s, the NYSE Compensation Committee determined that the Exchange was at a competitive disadvantage because it was unable to offer its senior executives stock-based forms of deferred compensation. To remedy this problem, in 1997, the Board of Directors approved the NYSE's Capital Accumulation Plan (CAP) for four of its most senior executives. Originally CAP provided a 25% match of variable compensation awards for eligible executives in a given year.
The variable compensation to which it applied was the NYSE's Incentive Compensation Plan (ICP) and its Long Term Incentive Plan (LTIP). CAP payments were deferred until retirement or termination.
In May 1999, the NYSE Compensation Committee and Board of Directors approved, and Grasso executed, his second employment agreement as chairman and CEO of the NYSE. The 1999 agreement modified Grasso's 1995 contract and extended his term to May 31, 2005. In fact, Grasso's 1999 employment agreement set forth five components of his annual compensation, which, for the first time included CAP. These were: (1) a base salary of $1.4 million; (2) a discretionary ICP bonus with a minimum target amount of $1 million annually; (3) a LTIP award; (4) a CAP award equal to 50% of his total variable compensation (ICP and LTIP); and (5) a Supplemental Executive Retirement Plan (SERP) award.
The annual compensation for all of the NYSE senior executives was set each February for the prior calendar year. Between the 1997 institution of CAP awards and Grasso's 2003 resignation, the process for setting executive compensation was as follows: Frank Ashen, the head of human resources, would collect median target compensation for a group of comparator companies from NYSE's compensation consultant, Hewitt Associates. He would also prepare a summary of each NYSE executive's performance for the year, based upon input from operating managers. Next, Ashen compared his raw data against 65 quantitative measurements to reach a score for each executive. That score comprised 65% of the individual's compensation. The chair of the Compensation Committee then had discretion to determine the remaining 35% of compensation figures. Thus, during his tenure as chair of the Compensation Committee, Langone was directly responsible for determining 35% of the compensation of NYSE executives. Also, he interacted with the NYSE Department of Human Resources by making his yearly proposals to Frank Ashen. After the chair made his recommendations, Ashen met individually with each of the members of the Compensation Committee to present and discuss the salary proposals. On the first Thursday of each February, the Compensation Committee would meet for a collective discussion and vote on all of the executives' compensation. Later that same day, the full Board of Directors would meet and vote on the same matters. It was the role of the Compensation Committee chair to make oral presentations to the Committee and the full Board before they voted.
The first time the Board of Directors had to approve CAP awards was in February 1998. The written materials prepared for the 1998 and 1999 Compensation Committee meetings, under the leadership of then chair Bernard Marcus, provided the Committee Members with worksheets that gave an exact value of the recommended CAP award for each participant. The "total compensation" column of those worksheets also displayed the recommended sum of each executive's base salary, ICP, LTIP and CAP award for the year. For example, the 1997 salary worksheet for Robert Britz, a NYSE executive vice-president who received a 25% CAP award, contained the following information (emphasis supplied):
Base Salary ICP LTIP CAP Total
Compensation
Comparator $400,000 $246,781 $640,020 -- $1,113,458
Median Target
1996 Actual $400,000 $350,000 No Payout -- $750,000
1997 Recommended $435,000 $410,000 No Payout 102,5002 $947,500
After Langone became chair of the Compensation Committee in June 1999, the values of recommended CAP awards were removed from the worksheets distributed to Committee members. In addition, the values for "total variable compensation" and "total compensation" no longer included the recommended CAP awards. For example, the worksheet outlining Grasso's recommended 1999 compensation was as follows:
Base Salary ICP LTIP Total Compensation Total Variable
Compensation
1998 $1,400,000 $4,204,000 $396,000 $6,000,000 $4,600,000
1999 $1,400,000 $5,652,000 $948,000 $8,000,000 $6,600,000
Grasso's February 2000 recommended 1999 compensation worksheet had the following statement underneath the chart: "Grasso will receive 50% of his variable compensation in the Capital Accumulation Plan." However, the document did not give a value for his 1999 CAP award, which was $3,300,000. The worksheet similarly failed to set forth that his actual recommended compensation was $11,300,000.
After the Committee voted to approve Grasso's compensation, a worksheet quantifying all of the components of Grasso's compensation, including the CAP award, and their sum total was sent to the NYSE CFO to effect payment:
Base Salary ICP LTIP Variable Total Cash CAP Total
Compensation Compensation Compensation
1998 $1,400,000 $4,204,000 $396,000 $4,460,000 $6,000,000 --3 $6,000,000
1999 $1,400,000 $5,652,000 $948,000 $6,600,000 $8,000,000 $3,300,000 $11,300,000
Dale Bernstein, the deputy head of NYSE's Human Resources Department, testified at her deposition that it was her job to prepare the worksheets of executives' compensation. She related that after Langone became chair of the Compensation Committee, Frank Ashen told her to remove the CAP column from the materials distributed to the Compensation Committee. Bernstein stated that she told Ashen that she thought the worksheets were clearer with the CAP awards displayed. However, she testified that she deferred to Ashen, who told her that Grasso did not want the CAP columns displayed. Thus, from February 2000 to February 2003, the materials distributed to the Compensation Committee did not have a CAP column. Bernstein stated that after the compensation packages were approved, she gave the finance division worksheets which displayed the values of CAP and total compensation figures.
In February 2000, the Compensation Committee4 was given materials indicating that Grasso's total 1999 compensation was $8 million, notwithstanding that his actual total compensation was $11.3 million. The minutes from the February 2000 Compensation Committee meeting do not indicate that Grasso's CAP award was discussed. However, speaking points prepared for Langone's remarks at the February 3, 2000 Board meeting indicate that Langone specifically told the Board that Grasso's 2000 CAP award was $3.3 million.
One member of the Compensation Committee, D. Maughan, testified at his deposition that the worksheet he was given at the February 2000 Committee meeting would have been clearer if it included a CAP column and a "real total compensation" figure. Two other members of the Compensation Committee gave deposition testimony that they thought Grasso had been awarded approximately $8 million in total compensation for 1999, when in fact, the actual total compensation approved for Grasso in 1999 was $11.3 million. Notably, the $3.3 million discrepancy was the exact value of the CAP award (which, again, was not disclosed on the compensation worksheet). However, four Board members (M. Karmazin, L. Wachner, G. Levin, and R. Murphy), testified at their depositions that it was clear to them, before they voted, that Langone was recommending that Grasso receive a $3.3 million CAP award for 1999.
Similar to the format for the prior year, the February 2001 worksheet for Grasso's compensation indicated a recommended "total 2000 Cash Comp" of $15 million.
Base Salary ICP LTIP Variable Comp Total Cash
Comp
1999 $1,400,000 $5,652,000 $948,000 $6,600,000 $8,000,000
2000 $1,400,000 $12,519,000 $1,081,000 $13,600,000 $15,000,000
The 2001 and 2002 worksheets added the word "also" to the CAP statement under the chart. They...
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