Victory Without Vindication
July 9 2008 by JP Donlon
Two years ago last April I sat in the Park Avenue office of Invemed, the investment firm of Ken Langone one of the most powerful men on Wall Street -respected if not always admired. The salty -tongued son of a plumber and a cafeteria worker grew up in
Langone is a unique character. Alone among the NYSE board members he stood up to the Torquemada of Wall Street, then New York State Attorney General Eliot Spitzer who indicted Grasso for being paid too much. Spitzer also accused Grasso and former NYSE compensation committee member Ken Langone of deceiving their fellow board members–a list of luminaries that included then Goldman Sachs CEO Hank Paulson, J.P. Morgan Chase’s William Harrison, and former Secretary of State Madeleine Albright. Grasso and Langone testily denied deceiving anyone. Grasso sued the exchange, demanding an additional $50 million he claims he was owed and accused his successor as chairman, former Citibank CEO John Reed, of defaming him. So firm was Langone’s conviction that Grasso and he would be vindicated that Spitzer’s irritation became palpable. As AG Spitzer was overheard saying he would drive a stake into Langone’s heart if the latter didn’t back off.
In a recent 3 to I ruling by the Appellate Division of the New York State Supreme Court, a victory of sorts came, ending a four year battle. Many of the NYSE directors that approved the compensation later, under pressure from Spitzer, said it was either too high or that they hadn’t realized how much he was really getting.
Like General McAuliffe, the acting commander of the 101st Airborne division, who when surrounded and outnumbered in Bastogne during the Battle of the Bulge, is said to have replied to German general von Luttwitz’s surrender ultimatum with the terse, “Nuts!,” Langone drew from his unique palette of colorful Queens street language to tell Spitzer to bugger off.
“They got the wrong fucking guy,” Fortune‘s Peter Elkind quoted Langone as saying in a 2004 story. “I’m nuts, I’m rich, and boy, do I love a fight. I’m going to make them shit in their pants. When I get through with these fucking captains of industry, they’re going to wish they were in a Cuisinart–at high speed.”
As Langone related the circumstances, Spitzer was wrong on the facts particularly about the NYSE board being mislead about Grasso’s $187 million compensation. Langone pointed to comments fellow board members made at the time but ignored by the AG that everyone on the committee knew everything about the compensation arrangement. Former Warnaco CEO Linda Wachner even said that it was painful the way “Ken made us understand everything.” (Interestingly, Spitzer never laid a legal glove on former New York State Comptroller H. Carl McCall, a prominent New York Democrat who served as chairman of the NYSE compensation committee.)
In his overreach to find a legal theory to support his indictment, Spitzer asserted that Grasso’s multi-year compensation violated
It’s also a shame in other respects. Had the case been tried in court the cross examination of principals involved would have offered more thrills and high drama than anything on Broadway. One of the highlights would certainly be the spectacle of former NYSE chairman John Reed explaining his reasons for going after Grasso and Langone by encouraging Spitzer to pursue the case. Reportedly the day Spitzer held a 45-minute press conference announcing charges against Grasso and Langone, the latter telephoned Grasso and said, “If you give him a nickel, I will never talk to you again!”
Grasso didn’t have to give up a nickel, but neither did he get a chance to have the world understand that the compensation scheme had a defensible logic to it. As Langone explained at the time, Grasso’s $140 million represented 37 years of service. None of his predecessors enjoyed the enormous surge in business that Dick had in 1999 through 2001. He received 2.5 percent a year for the first ten years, as did Grasso’s predecessors-except none of them were at the Exchange for ten years. Grasso started out as a $82 a week union clerk. His total accumulated time of 37 years placed him at 70 percent compared with Jim Donldson’s 10 percent (four years at 2.5 percent a year). There were NYSE memos saying that the board wanted world-class talent and was willing to pay for it.
Warming to his subject Langone added the following: “You want an interesting number? If you took a penny a share and say that’s for both sides of the trade, how much do you think the volume profit was to all of the NYSE members for a year? —Four billion dollars. Four billion dollars!” (Invemed alone made $100 million in 2000.)
So in the board’s view-and this is the heart of the issue and what every business leader should take to heart-Grasso earned his money. One may quibble over amounts but the reasoning or-more to the point-the process involved employed the kind of vetting demanded of post SOX governance hygeine. If board governance and the sanctity of contract means anything these days it is the right and duty of the board to arrive at an independent judgment over questions like CEO pay. Winning on a technicality may prove bittersweet for Grasso, but there’s no vindication on the larger issue that is fundamental to many disputes over CEO compensation.
The real tragedy is that it takes several years and an army of expensive lawyers in order to demonstrate the government’s overreaching. Makes you think, how often does this sort of thing happen to people who can’t afford either the time or money to push back against the state?