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Note: All conversation is paraphrased. Host: Lee, could you first layout the background related to the Spitzer, Grasso lawsuit? Hevner: The basic facts are these in summary form: In August of 2003, the Securities and Exchange Commission (the SEC) made a seemingly routine request for information from the NYSE related to its operations. In the report that was submitted the SEC was shocked to find that NYSE Chairman, Mr. Dick Grasso had been given a compensation package on the order of $140 million. The SEC immediately demanded more information and was aghast to learn that another $48 million was still to be paid. This set off alarm bells and the SEC decided to investigate further. When the public got wind of this alarmingly huge pay package a firestorm of outrage erupted. Coming on the heels of other scandalous CEO pay packages being contested, very publicly, in the courts, the public was outraged. After all, the NYSE is supposed to be a regulator and shining example of integrity for the broker industry. The public outcry caused Grasso to resign in September of 2003 and prompted investigations by the SEC, by the New York Attorney General and internally by the NYSE itself. Host: What does the lawsuit allege? Hevner: While the filing is over 60 pages length it can be boiled down to three main points as follows: 1. Mr. Grasso's compensation is unreasonable under New York State Nonprofit laws 2. Mr. Grasso had improper influence on the NYSE Board members who approved the compensation package. 3. The compensation was approved by the Board based upon incomplete, inaccurate and misleading information. While Grasso had agreed to forego the $48 million in compensation still due to him, he claims everything was legal and approved by the Board of Directors. He claims his compensation was commensurate with other CEO's in the financial industry. The NYSE wants him to return over $100 million of the package. After the suit was filed Mr. Grasso counter sued for the $48 million he had previously given up and vowed to fight for his full package. Host: What do you believe the individual investor thinks of this mess? Hevner: I don't believe we will see the outrage here that we saw against companies like Enron, WorldCom, Tyco, etc. Unlike these cases, this money is not seen as coming directly from our pockets. It comes from ultra-rich brokerage houses. Of course brokers make their money from us, the individual investor, but the link is a little more indirect. Host: What are the various elements of debate at play here? Hevner: There seems to be two camps on this issue. In Grasso's defense is the camp that says he was so effective a leader at the NYSE that he earned the compensation. It was, in fact, approved by the Board of Directors and some say he is being persecuted only for accepting what was given to him. This camp says government should stay out of the internal affairs of a corporation. In addition there is a whiff of political agenda about this whole affair as Spitzer may be running for governor of New York which taints the who thing. Against Grasso is the camp that makes these points: 1. The NYSE is a Nonprofit organization and has tax-exempt status. Nonprofits earn this status because they must swear to work for the benefit of the public and all funds outside of reasonable compensation and expenses must go toward advancing the public good for which it was established. Can anyone truthfully say that giving $200 million to Dick Grasso is good for the public? 2. The NYSE is a Self Regulating Organization (SRO) with oversight by the SEC. It has the job of regulating the broker industry. Essentially it is a broker "watchdog" run by brokers and this can result in major conflicts of interest. The Board of Directors that approved Grasso's package included individuals from companies that are regulated by Mr. Grasso. The conflict is obvious. Vote against the package and you may risk some type of retaliation! Host: Do you have a personal opinion on this issue? Hevner: I have both a personal opinion and a major question. I tend to come down on the side of those who believe that the compensation was extremely excessive. It shows a tremendous arrogance on the part of what looks like an "old boys club" running the NYSE. They seem to be saying that they don't need to live by the rules of the "working class" where money is earned and not given. After all, even if Mr. Grasso was a very effective manager, he is not worth $200 million. Would the NYSE have gone bankrupt without him? No. Did Mr. Grasso risk anything to obtain such a reward? No. Capitalism rewards entrepreneurial risk. This wasn't present. Plus the NYSE is a NONPROFIT organization. The money should have been used in other ways to improve the operations of the exchange to the benefit of the individual investor. Its not like the NYSE has no problems. Individual investor have, for years, been suspicious of the "specialist" manner of operation, believing it leaves us at the mercy of insider stock price manipulation. But that is a subject for a completely separate discussion. I believe that both Mr. Grasso and the Board of Directors are at fault here, if for nothing else, at least a total distain for the public and public opinion. Its yet to be determined if they did something illegal. Its already determined that they did something stupid in the extreme. Host: And your major question? Hevner: Just this: Where is the Securities and Exchange Commission in this whole affair? Are they not tasked with the role of overseeing the NYSE. How could they be surprised at the final hour by this compensation package? As an overseer is it not reasonable to ask occasionally what compensation is being paid? The chain of command leads directly to the SEC and I don't hear much about their culpability. Let's hope they, at some point, explain themselves. Host: What's next? Hevner: This will all die down in the near future as the trial is about a year away. But, in all honesty, as an individual investor I believe it will be fun to watch. The government against an outrageously over-compensated fat cat? - I'm not sure I care who loses. |
