Grasso Quits NYSE
Amid Pay Furor

The forced resignation of New York Stock Exchange Chairman Dick Grasso could usher in a new age for the world's largest stock market.

Wednesday, Mr. Grasso, 57 years old, was pressured to step down after a public outcry over a $139.5 million retirement-pay package that he had built up over 36 years at the NYSE. Late Wednesday night, the exchange's directors were discussing candidates for the job of interim successor in a conference call. It remained unclear who would take the post.

The resignation, after an emergency NYSE board meeting Wednesday, followed calls for Mr. Grasso to resign in recent days by a growing chorus of Big Board directors, floor traders, institutional investors and politicians. Critics were especially furious over his pay package because the markets are just now recovering from an unprecedented period of corporate scandal that included shockingly high compensation for some executives.

But the furor masked broader, more fundamental issues facing the exchange. Mr. Grasso was a forceful proponent of the Big Board's 211-year-old auction system -- where every trade still passes through at least one live trader on the NYSE floor -- despite a host of technological improvements. He has favored the Big Board's position as a secretive club run by Wall Street insiders -- and has had his pay set by directors whose firms Mr. Grasso regulates. In 1999, he scotched plans for the exchange to go public, which some traders say could help the NYSE better compete with rivals. And Mr. Grasso has argued that the Big Board, to operate effectively, needs to remain both a market and a regulator. Skeptics see conflicts inherent in that arrangement.

NYSE Chairman Dick Grasso spoke last week at a panel discussion on corporate governance in Washington.

Now all those issues are in play. Indeed, Mr. Grasso's ouster could force historic governance changes on the Big Board, reducing the power of industry insiders to rule the NYSE. And it could even put more pressure on the NYSE -- and Wall Street, more broadly -- to dilute or give up its self-regulatory powers. That would be a big blow for the securities business.

In his eight years as chairman and chief executive, Mr. Grasso steered the exchange through the rise of competition from Nasdaq and electronic-communications networks. He did that by grafting new technology onto the old system, while maintaining one of the last human-dominated exchanges in the world. Mr. Grasso also has brought in new stock listings, kept NYSE market share high and marketed the exchange effectively.

But he became a casualty of the public's revulsion over 1990s-style corporate excess. He was paid like a big-time Wall Street chief executive, rather than a regulator. The National Association of Securities Dealers, by contrast, pays its CEO about $2 million a year. And Securities and Exchange Commission Chairman William Donaldson -- whose total annual pay when he served as Big Board chairman in the early 1990s was about $1.5 million -- now makes $142,500 a year.

Mr. Grasso's pay package -- he received more than $30 million in 2001 alone -- also became a flash point because it came amid a weak market that squeezed many NYSE members. Mr. Grasso pushed the exchange to computerize some of its operations, so that some orders could be routed around brokers. That resulted in slashed commissions at a time when broker paychecks were already being hurt by the market slump.

Some floor traders were livid when Mr. Grasso's pay was disclosed because they had been asked to pay a total of more than $80 million in new fees since 2001 for technological improvements and regulation at the exchange. And the pay disclosures came on the heels of a continuing NYSE investigation into the practices of the floor's elite specialists which match buyers and sellers of stocks. The exchange is examining whether some specialists stepped between valid buyers and sellers of stock to make trading profiting for themselves, rather than for investors. The specialists say they have done nothing wrong.

Special Meeting

Wednesday, at a two-hour special board meeting, NYSE directors voted 13 to 7 in favor of Mr. Grasso's resignation, according to a director. Among those who voted for Mr. Grasso to leave were several powerful Wall Street chiefs, including Henry Paulson Jr. of Goldman Sachs, Philip Purcell of Morgan Stanley and William Harrison of J.P. Morgan Chase, according to the director. Mr. Harrison kicked off the conference call, arguing that the integrity of the exchange was damaged and couldn't recover. Several of Mr. Grasso's supporters rallied around him. One director argued that the entire NYSE board should quit, and that Mr. Grasso should stay.

RAPID FALL • Feb. 6: New York Stock Exchange sets up committee to improve its governance.   • March 23:1 Big Board nominates Citigroup Chairman Sanford I. Weill to be a "public" representative on its board; nomination is withdrawn after objections from regulators.   • March 26:2 SEC Chairman William Donaldson sends letter to NYSE asking for corporate-governance overhaul.   • April 28:3 Government announces $1.4 billion settlement in dispute over Wall Street analysts' conflicts of interest.   • May 7:4 The Wall Street Journal discloses NYSE Chairman Dick Grasso's pay and retirement package of $80 million to $100 million.   • June 5: Grasso is reappointed chairman.   • Aug. 27:5 Board discloses Grasso's $139.5 million retirement package.   • Sept. 2:6 Donaldson asks Big Board for details of Grasso's pay.   • Sept. 9:7 After special board meeting, NYSE discloses additional $48 million in retirement pay, which Grasso forgoes.   • Sept. 16:8 Four top pension funds call on Grasso to resign.   • Sept. 17:9 After emergency board meeting, Grasso resigns.

"For the past 36 years I have had the honor and privilege of working for what I believe is the greatest equities market in the world," Mr. Grasso said in a statement issued late Wednesday. "Today, I shared with the board of directors in a conference call that, with the deepest reluctance and if the board so desired, I would submit my resignation."

Even before Mr. Grasso's ouster, some NYSE insiders were pressing for change. Some Big Board directors, under pressure from regulators, now are preparing to propose changes to how the exchange's board operates. These include barring the chairman from having input into the nomination of new directors. The preliminary proposals are scheduled to be discussed by the NYSE's special committee on governance at a meeting set for Sept. 29 and are expected to be presented to the full board three days later.

Some NYSE seat owners, frustrated over disclosure and governance at the exchange, are pushing for the Big Board to consider an initial public offering of its own shares. That would resurrect a popular idea that Mr. Grasso killed four years ago without ever publicly making his reasons clear.

The Big Board IPO plan will be aired at a special exchange-member meeting scheduled for today. The NYSE is owned by 1,366 people and institutions that hold "seats," at the exchange. The members, or their representatives, work on the exchange floor in one of two capacities: Traders buy and sell stock for themselves or for customers. Specialists also may trade for themselves, but they have an obligation to ensure the market's smooth functioning by buying stock when others want to sell, and buyers aren't stepping forward.

It was the governance issues raised by Mr. Grasso's pay package that took center stage in recent weeks. Critics from a number of the Big Board's constituencies were aghast that a regulator could be paid so much -- and have his pay set by those whom he regulates.

On the NYSE floor, traders were circulating petitions, agitating for new blood in the exchange's boardroom and calling for Mr. Grasso to step down. They were angry that their fees had risen in the years Mr. Grasso received his lofty pay. Some NYSE directors, upset at not knowing the full size of his retirement nest egg, were quietly discussing whether to ask him to leave.

In Washington, the SEC's Mr. Donaldson, a former Big Board colleague, was crying foul over the exchange's governance. The pair are old rivals, dating back to 1990, when Mr. Grasso was passed over for the NYSE's top job, which went to Mr. Donaldson instead. For the next four years, Mr. Grasso privately campaigned to succeed Mr. Donaldson, according to a director who was there at the time. In 1995, Mr. Grasso persuaded the exchange's board that he should take over. Now, Mr. Donaldson was in a position to criticize the man who helped maneuver him out of a cherished Big Board role.

Wednesday, Joe Lieberman, the Democratic presidential contender and senator from Connecticut, called on Mr. Grasso to leave. "Instead of setting an example of ethical leadership for the market he oversees, Mr. Grasso's behavior has shaken the faith of investors and the foundation of the stock exchange," the senator said. Another Democratic presidential hopeful, Sen. John Edwards of North Carolina, also said Mr. Grasso should resign.

For weeks, Mr. Grasso, who has declined repeated interview requests, hung tough. And until earlier this week, some at the Big Board believed he would be able to survive the storm. An adept politician, Mr. Grasso wielded significant influence on the NYSE floor, as well as at major securities firms, which he regulated. Despite its aches and pains, the NYSE remains the most prestigious exchange around.

In recent years, however, dissent has mounted on the trading floor, as some smaller firms got pinched by the bear market and saw technological changes eat into flow of orders. These firms also saw their profits squeezed when the exchange switched to decimalization, or trading in penny increments, instead of 12.5-cent increments. At the same time, members had no idea how much money Mr. Grasso was accumulating in his own pay package.

His highest point as exchange chief came after the horror of Sept. 11, which tore a hole in lower Manhattan's financial district. Markets were shuttered. Sleeping nights on the couch in his office, Mr. Grasso worked to ensure that his trading floor and the brokerage firms connected to it could begin trading again on Sept. 17. Joined by Sen. Hillary Clinton and New York Governor George Pataki that morning, Mr. Grasso recast himself in a more political light. He adopted a patriotic tone in exchange advertising, displaying an enormous American flag over the NYSE's Broad Street entrance and on the Big Board's 2002 annual report.

But as the months went by, attitudes toward Mr. Grasso shifted. Many exchange members were outraged to learn that he accepted a $5 million bonus for his work in the wake of Sept. 11. It was that special award that lifted his pay for 2001 to more than $30 million, nearly equaling the net income of the entire exchange.

This year, things got more rocky. The exchange was embarrassed late in March when an attempt to nominate Citigroup Inc. Chairman Sanford I. Weill as a director representing public shareholders on the board was foiled. Critics said it was preposterous to appoint Mr. Weill after his company had just paid $400 million to settle government allegations that its stock analysts issued misleading research to investors. Mr. Weill withdrew his name.

Soon after, Mr. Donaldson, the SEC chairman, asked the Big Board to begin a review of its own corporate-governance practices. Then the Wall Street Journal disclosed that the NYSE had launched its investigation of specialist firms.

Mr. Grasso went on the defensive. In an interview on CNBC, he said any such trading infractions were akin to "jaywalking," not "mass murder." But investors and some board members were concerned. And when the Journal disclosed in May the existence of Mr. Grasso's pay-and-retirement package, some floor traders and directors became more restive.

In a compensation-committee meeting around this time, new members Henry Paulson of Goldman Sachs and James Cayne, chairman and CEO of Bear Stearns Cos., gathered with the group's other directors to review Mr. Grasso's contract. The two directors were privately incredulous at the size of Mr. Grasso's retirement package, according to people familiar with their thinking. But his 1999 contract guaranteed him the $139.5 million, which he will get to keep.

But the board was split on whether to draw up a new pay pact -- Mr. Grasso recently had been re-elected to another term as NYSE chief -- and whether to disclose the details of the old one. In an August board meeting, Mr. Grasso argued that he didn't think "it was wise" to proceed with a new pay agreement, according to minutes. But director Laurence Fink, chairman and CEO of BlackRock Inc. argued that the NYSE should provide Mr. Grasso with a new pay pact and release it to the public, according to minutes. The board decided to wait.

Regulators in Washington soon stepped in. On Sept. 2, Mr. Donaldson wrote a strongly worded letter to H. Carl McCall, the former New York State Comptroller who had been appointed compensation-committee chairman in June. In the letter, Mr. Donaldson demanded that the NYSE provide a detailed accounting of its decision to approve Mr. Grasso's pay package, saying it "raises serious questions regarding the effectiveness of the NYSE's current governance structure." A week later, NYSE directors dialed into a conference call to discuss when and how Mr. McCall should respond to the SEC's information request.

Bombshell

Then, a bombshell: Mr. McCall told directors that in addition to the $139.5 million, Mr. Grasso was entitled to another $48 million in deferred pay over the next four years.

A number of directors were taken aback. One director urged Mr. Grasso to give back the $140 million, a person familiar with the matter says. Mr. Grasso argued that to return the money would invalidate the process by which it had been awarded. Several directors countered that they were willing to call a vote to keep Mr. Grasso from receiving the $48 million, even though they knew the move would be disruptive, directors say.

Mr. Grasso stepped off the call, telling directors he needed some time to confer with his advisers, including well known Wall Street lawyer Martin Lipton, a partner at Wachtell Lipton Rosen & Katz, according to those who were on the call.

Ten minutes later, according to several directors with knowledge of the call, Mr. Grasso returned to say he thought he should give up the money. The directors voted unanimously to support him.

The NYSE announced the additional $48 million on Sept. 9, and Mr. Grasso's decision to forgo it. But divisions in the board persisted. An exchange spokesman asked NYSE compensation-committee members to stand behind Mr. Grasso in the news conference that day. But several balked, leaving Mr. Grasso and Mr. McCall to face the media alone.

Meanwhile, critics erupted. Several floor traders who own NYSE membership seats put together a petition calling for new management, a highly unusual move. One trader, Patrick J. Collins III, made an unusual appearance before a Sept. 5 meeting of the NYSE's special committee on governance. According to a transcript of his remarks, he told directors that many brokers on the floor were "shocked" when they heard about Mr. Grasso's pay and retirement package. "One board member thought it was a typo," Mr. Collins told them. "I think the trust of the membership has been damaged. I think the public trust has been shattered. You men held very important jobs. Did you ever make this amount of money?"

The exchange, in a statement, said, "Every member of course is entitled to express his or her viewpoint, and the special committee on governance invited members and a variety of other constituents to offer their views" during the governance-committee meeting.

The pressure kept mounting. The Journal disclosed this week that several NYSE directors -- including Mr. Paulson, Morgan Stanley's Mr. Purcell, Credit Suisse Group Co-Chairman John Mack, and J.P. Morgan Chase's Mr. Harrison -- privately were discussing options to quell the furor, including calling for Mr. Grasso's resignation.

In Sacramento, Calif., state treasurer Philip Angelides began agitating to take action. On Friday, he called Sean Harrigan, president of the California Public Employees' Retirement System. "Sean, I want to speak up on this issue," he said. "I'm inclined to write a letter and I want to know if you'll join me." Mr. Harrigan agreed.

Two days later, Mr. Angelides drafted a letter to Mr. Grasso and the board. The pay disclosures, he wrote, had "set back critical efforts to restore the public's faith in our financial system." On Tuesday, Messrs. Angelides and Harrigan, along with Jack Ehnes, CEO of the California State Teachers' Retirement System, publicly asked for Mr. Grasso's resignation. They were joined in short order by officials in New York, North Carolina and Iowa.

Until Wednesday, Mr. Grasso tried to put on a brave face. He still made public appearances, including ringing the opening bell, a tradition he has popularized since becoming chairman. On Tuesday morning, he was flanked on the balcony overlooking the trading floor by senior executives of Shinhan Financial, Korea's largest financial-services company. A smiling Mr. Grasso then joined the group on the floor, where they observed the day's first trade.

Write to Kate Kelly at kate.kelly@wsj.com²⁴, Susanne Craig at susanne.craig@wsj.com²⁵ and Ianthe Jeanne Dugan at ianthe.dugan@wsj.com²⁶

Updated September 18, 2003 4:26 p.m.