Tuesday, June 14, 2005

Spitzer indicts WSJ

He would certainly like to.

The WSJ runs a scathing report on NY attorney general / governor-elect Spitzer's case against Dick Grasso, former head of the NYSE. Recall that Grasso was forced to resign after the public outcry over his $139 million compensation package. The NYSE, under John Reed, commissioned a report by former federal prosecutor Dan Webb that became the basis of Spitzer's case against Grasso.

Well apparently there were a thousand pages of interviews and supporting material that Webb didn't include in his report that guts Spitzer's case. The WSJ notes that the NYSE (tacitly supported by Spitzer) fought the release of the documents but lost.

The AG charges in his suit that Mr. Grasso's compensation was not "reasonable"--that directors awarded him money based on "incomplete, inaccurate and misleading" information; and that Mr. Grasso influenced his awards. Mr. Spitzer is also suing former compensation committee head Ken Langone--on grounds that he misled directors about the true size of the compensation package--as well as the Exchange itself.

The evidence does not corroborate. Some excerpts (some are really delicious):

Former New York State Comptroller Carl McCall, who brought Mr. Grasso's contract to fruition, was viewed by his colleagues as incompetent and, in the words of Goldman Sachs CEO Henry Paulson, not "financially sophisticated."

...former Merrill Lynch Chairman David Komansky: "We knew what we were doing when we paid him. We did it purposely, and we believed it was the right compensation,"

Mr. Paulson (chairman of Goldman, Sachs) described Mr. Grasso as an "A+" CEO...Bear Stearns' Mr. Cayne bluntly told interviewers that without Mr. Grasso it was "goodnight, Irene."

The committee also believed Mr. Grasso could be making much more elsewhere, especially, as former AIG chief Maurice Greenberg noted, "in the context of an 'explosion' in executive compensation in America during that time." One committee worry was that the Exchange was unable to offer Mr. Grasso any equity or stock options. Former Johnson & Johnson CEO Ralph Larsen said unless the Exchange only wanted to "attract and retain the 'plodders,'" it needed to pay well.

Compensation committee members also took pains to explain to investigators the process by which they arrived at pay decisions. This involved using a group of comparable companies as a measure as well as using their own judgment. Former Morgan Stanley CEO Richard Fisher noted that "a great deal of thought and work went into determining the correct comparator group," while First Albany Companies Chairman George McNamee, who was never on the comp committee, nonetheless called the process of setting targets "the most elaborate performance measurement exercise of any company I was familiar with, by a lot." The committee also had outside consultants review the contract. According to one committee member, DaimlerChrysler CEO Juergen Schrempp's lawyer also took a peek.
After all, said Mr. Karmazin, if Mr. Grasso had been at a company with stock options, "he would have left with $500 million."
The Webb report suggests Mr. Grasso had improper involvement in naming board members, including those on the compensation committee. Not only was this standard practice across much of corporate America, the interviews make clear Mr. Grasso had little if any impact on the committee's decisions. Not one director could name a concrete instance of Mr. Grasso using cronyism or friendship to influence a decision and many were incredulous at the suggestion.
In sum, BlackRock CEO Laurence Fink stated that by the summer of 2003 anyone who "indicates that there was opposition at the time to entering into the deal at all is practicing 'revisionist history.'" He further called "the notion that some directors wanted to scrap the contract, that the contract was bad, or that the money was not Grasso's 'total crap.'"
Leon Panetta, former Clinton White House chief of staff, speaking of a later McCall (NY State comptroller H. Carl - chief of compensation committee) performance, was blunt: "Carl knew nothing." (as in way out of his depth) [Note that Spitzer did not name McCall, a fellow Democrat, in the lawsuit]
Many directors felt that in recent years the board had been stocked with celebrities who didn't understand the Exchange. Former Morgan Stanley chief Mr. Fisher noted "that many directors 'couldn't tell a stock from a bond' and were only on the Board because they represented particular constituencies."...Cayne referred to Ms. Albright as "unbelievably irritating." Mr. Levin told investigators that some of Mr. Schrempp's actions were designed simply to "cover his ass."

Seems Spitzer has another shaky case behind his populist bluster. $139 million is a lot of money but compared to the compensation of other CEO's it's not fundamentally unreasonable or dishonest. This was a lump sum payment where CEOs get tens of millions a year WITH benefits. If this goes to trial, Spitzer better hope for a blue-collar jury for whom the very idea of $139 million must mean the defendant is a crook and guilty. Maybe after the Sihpol loss, Spitzer will be the one who will want to cop a plea.

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