Wednesday, June 25, 2008
The battle between the New York State Attorney General and Richard A. Grasso, the former CEO of the NYSE, over his outsize compensation continues, and Grasso achieved a significant victory today, as the New York Court of Appeals threw out four claims in the AG's complaint that were based on the common law and not the New York not-for-profit statute. The trial court had held that the AG could bring these claims under the parens patriae doctrine to vindicate the interests of the investing public. A majority of the Appellate Division reversed because it saw the non-statutory claims as an attempt to circumvent the fault-based claims of the statute. New York's highest court unanimously agreed with the Appellate Division and dismissed the four nonstatutory claims. In a opinion written by Chief Judge Kaye, that largely walked through the relevant statutory provisions and compared them with the AG's nonstatutory claims, the court emphasized that the statutory provisions provided the directors and officers with the protections of the business judgment rule and were essentially fault-based. In contrast, the AG's nonstatutory claims attempted to impose liability based on the size of Grasso's compensation. To allow the AG to do so would override the fault-based system created by the legislature and would permit the AG to reach beyond the bounds of his authority. The court also noted that as a matter of separation of powers policy this extension would be especially troublesome: "Although the Executive must have flexibility in enforcing statutes, it must do so while maintaining the integrity of calculated legislative policy judgments." The People &c. v. Grasso (N.Y. June 25, 2008).
What happens next? The defendant has not contested the AG's authority to bring two of the statutory claims; the AG's authority to maintain the other two statutory claims is the subject of another appeal pending in the Appellate Division. Will the current AG, Andrew Cuomo, fold and view this case as an unfortunate legacy of his predecessor Eliot Spitzer? Let's wait and see.