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NYSE asks state, federal regulators for aid

The NYSE board asked state and federal regulators Thursday to pursue an investigation into how the exchange’s former boss Dick Grasso managed to rack up nearly $200 million in retirement benefits and deferred compensation.
/ Source: The Associated Press

The New York Stock Exchange board asked state and federal regulators Thursday to investigate how its former chief executive and chairman Dick Grasso was awarded “unreasonable compensation” of nearly $200 million.

The board referred an internal report by former federal prosecutor Dan K. Webb to the Securities and Exchange Commission and to New York Attorney General Eliot Spitzer, asking that they “pursue the matter both on our behalf and as part of your broader responsibilities.”

The report examines the decisions that led to Grasso’s ouster Sept. 17. A 35-year NYSE veteran, Grasso stepped down under a cloud after the exchange revealed he had been promised $187.5 million in retirement benefits and deferred compensation.

In a letter accompanying the report, interim chairman and CEO John S. Reed said members of the NYSE board had reviewed and discussed the matter, and determined that “serious damage has been inflicted on the exchange by unreasonable compensation of the previous chairman and CEO, and by failures of governance and fiduciary responsibility that led to the compensation excesses as well as other injuries.”

The letter also said: “While we believe that you are more capable of pursuing the matter than the exchange itself, we assure you that we will participate or cooperate in any way that is appropriate.”

An attorney for Grasso wasn’t immediately available for comment.

Spitzer confirmed that his office had been asked to look into whether legal action was warranted to recover Grasso’s pay. He said the attorney general’s office would review the Webb report and conduct its own investigation, in cooperation with the SEC, to see if there had been violations of New York’s not-for-profit corporation law.

The SEC said it would seek to determine whether Grasso’s compensation and the process of setting it violated federal securities laws or the exchange’s own rules. The SEC, which has closely watched developments at the exchange since the pay fiasco, said it will coordinate its investigation with Spitzer’s office.

Because the NYSE is a not-for-profit member organization, a legal argument could be made that paying its top executive such a large sum was an abuse of its resources. Regulators could file a lawsuit or negotiate a settlement with Grasso. Some of the board members who approved Grasso’s pay package could also end up in court.

“There aren’t a lot of cases where someone has been pursued in the case of excessive compensation,” said Grant Vingoe, a lawyer specializing in market regulation at Dorsey & Whitney. “The real question is what the (Webb) report says about whether he used undue influence, or did he withhold information from the board.”

Reed, a retired co-CEO of Citigroup brought in to help reform the exchange, launched the internal probe into Grasso’s pay in September. Webb’s inquiry involved more than 60 interviews, the NYSE said.

As part of the NYSE’s reforms, which were approved by the SEC last month, the exchange agreed to split the responsibilities of chairman and CEO, and to appoint a chief regulatory officer. The NYSE board was completely overhauled as well. None of the current members served on it when Grasso’s lavish package was negotiated.

On Thursday, the new board appointed former Nasdaq Stock Market president and deputy chairman Richard G. Ketchum to the new regulatory post, effective June 2. The board was taking steps to see if he could start work earlier.

Former Goldman Sachs Group president John Thain was named CEO last month and will formally move into the job Jan. 15. But so far no new chairman has been appointed. Reed, 64, insists he is eager to return to retirement and has said naming a permanent chairman would be a top priority for the directors.

Ketchum, 53, worked with the Nasdaq market and its regulatory unit, the National Association of Securities Dealers, for 12 years. Before that he spent 14 years with the SEC, including eight as director of the division of market regulation. Since June, Ketchum has been general counsel of the corporate and investment bank of Citigroup Inc.

“I am honored to be chosen by the New York Stock Exchange for this important post,” Ketchum said. “Believing passionately in self-regulation and market integrity, I look forward to contributing to the exchange’s role in serving the investor community.”

Marshall N. Carter, chairman of the NYSE board’s regulatory oversight and budget committee, said Ketchum’s annual base compensation has been set at $600,000, with target bonus of $600,000. Until Ketchum joins the exchange, his duties will be handled by Edward Kwalwasser, the NYSE’s executive vice president for regulation, who plans to retire Oct. 1.

Also Thursday, the board authorized Reed to create a task force to study market structure and trends, and to conduct an independent review of the exchange’s capabilities as a self-regulatory organization — specifically focusing on floor operations and the organizational capacity for responding to surveillance alerts.

The 2004 regulatory budget approved the hiring of 43 new people, bringing total staffing to 650, Carter said.