Executive Compensation

2. The attorney general was authorized to bring such an action under specific sections of the N-PCL. For example, N-PCL §720(b) (Actions on Behalf of the Corporation) provides that the attorney general may bring certain actions such as one to set aside unlawful transfer of corporate assets as well as relief in cases of breach of fiduciary duties by officers and directors (which should include any wrongful payment by the NYSE of unreasonable compensation of which an officer or director was or should have been aware).

3. N-PCL §112 authorizes the attorney general to restrain persons from exercising corporate rights “not granted to them by the law of the state.” (One example would seem to be an ultra vires act in a violation of the N-PCL itself.) This implies the authority to recover a payment that was beyond the authority of the corporation to make.

4. The attorney general does not appear to have lost standing following the merger of the NYSE into a for-profit entity on March 7, 2006. See N-PCL §§905(b) and 908(i). Supreme Court Justice Ramos in reaching this same conclusion stated:

In October 2006, in a decision reached on motions before trial, Justice Ramos concluded that the attorney general correctly brought the claims pursuant to his authority under the N-PCL as well as in accordance with the principles of parens patriae. The Supreme Court decision turned out to be the only victory for Mr. Spitzer in this case. On appeal, the Appellate Division, in a three-to-two decision, reversed Justice Ramos.

Sudden Death

• Of the ‘Grasso’ Litigation. Between June 25 and July 2, 2008, a little over one year after the Appellate Division reversed the Supreme Court on most of the causes of action against Mr. Grasso, the following occurred:

a. On June 25, the New York Court of Appeals affirmed the Appellate Division’s dismissal of four of the six claims brought against Mr. Grasso.³

b. Six days later, on July 1, the Appellate Division dismissed the two remaining claims against Mr. Grasso based on the March 2006 merger of the NYSE into a for-profit entity.⁴

c. Just one day after the Appellate Division decision (July 2), current Attorney General Andrew M. Cuomo announced the state would not appeal. Thus ended the state’s litigation against Mr. Grasso over his compensation.

Appellate Courts’ Reasoning

In support of its conclusion that parens patriae did not give the attorney general standing to sue Mr. Grasso in this case, the Appellate Division cited numerous court decisions holding that the parens patriae principle did not justify a sovereign, such as a state, bringing an action in support of claims that are essentially the claims of private parties (as distinguished from the well being of the public). (The Court of Appeals explicitly did not address the parens patriae issue.)

Both the Appellate Division and the Court of Appeals held that the attorney general had no standing under several of the N-PCL sections cited by him in support of his position because his authority was not explicitly stated in these sections. Other sections of the N-PCL explicitly stated the attorney general’s authority to bring action under those sections. As stated by the Appellate Division in its 2007 decision, “expressio unius est exclusio alterius.” People v. Grasso, 836 NYS2d 40, 46-47 (N.Y. App. Div. 2007)

As noted, the Appellate Division rendered the coup de grâce on July 1. It held as to the two remaining causes of action against Mr. Grasso that when the NYSE merged into a for-profit entity on March 7, 2006, any standing the attorney general might have had to bring claims under the N-PCL ended. As noted above, Justice Ramos had addressed the merger and reached the opposite conclusion. Until the July 1 decision of the Appellate Division, neither of the appellate courts had mentioned the merger as having a consequence to the standing of the attorney general.

Thus, the Appellate Division and the Court of Appeals did not even “get close” to the issue of whether Mr. Grasso’s compensation was reasonable or reasonably determined. Some may say that behind the courts’ decisions may have been issues other than those suggested by their opinions as to the attorney general’s standing.

One explanation may lie in the March 2008 downfall of Mr. Spitzer, the initiator of the litigation. His aggressive attacks on financial service companies and executives employed by them, for example, destroyed careers and cost some of those companies dearly. Mr. Spitzer’s personal downfall occurred in March 2008, while governor. No doubt, the continuance of this litigation, in a very troubled economic environment for the country, including financial centers like New York, must have seemed an especially undesirable legal intervention at this particular time.

A second reason for the abrupt dispatch of the Spitzer/Grasso litigation certainly must have been the reluctance of courts to be the arbiters of reasonable compensation. As said by the Court of Appeals at the end of its decision on June 25: