Grasso's Conflicts of Interest

"For example, one former Compensation Committee member was confronted by Grasso after he had privately expressed concern to [Frank] Ashen about a component of Grasso's proposed compensation for 2000. The director testified that 'he was a little taken [a]back that there was an ear to the committee … and that my hesitancy was reported immediately.' The committee member, who ultimately approved Grasso's proposed compensation for the year, recalled thinking 'thank God I escaped that one.' "

"Grasso's ability to assist Compensation Committee members is demonstrated by the 'quiet assurance' that he provided to Merrill Lynch in 1998 when it encountered difficulty in gaining the approval of the NYSE Market Performance Committee for a sale of its specialist division. After that committee met and withheld its approval, Merrill Lynch complained to Grasso. An e-mail from a Merrill Lynch employee forwarded to Merrill Lynch Chief Executive Officer David Komansky, who served on the Compensation Committee from June 1997 to June 2003, states that Grasso had 'quietly assured me that this deal will move ahead.' Komansky was urged to call Grasso to remind him 'how important it is to Merrill Lynch … that this deal move ahead seamlessly,' and on Nov. 23, 1998, he did. The sale was approved in December 1998."

Before and After Langone

The $187.5 million payment … was comprised almost entirely of compensation and benefits that Grasso had accumulated during the four years between 1999 and 2002, when Langone chaired the Compensation Committee. … First, they simply were not "reasonable" Grasso's compensation for those years of $80.7 million was more than four times the total compensation of $17.8 million that he received for the preceding four years, when the Compensation Committee was not headed by Langone.

NYSE Compensation and Benefits

"The Incentive Compensation Plan (ICP) was the NYSE's largest bonus program. Grasso received a $13.6 million ICP award for 2000 and a $16.1 million ICP award for 2001. For most NYSE executives… ICP awards were determined based on the NYSE's performance against targets that had been set a year earlier. Those standards do not appear to have been applied to Grasso."

"While many large for-profit corporations have SERPs, much of the bonus compensation paid by those corporations comes in the form of stock options or restricted stock, which are typically excluded for the purpose of determining SERP benefits. The NYSE implemented ICP and LTIP bonuses to compensate for the fact that, as a not-for-profit corporation, it could not issue stock. However, unlike for-profit corporations, NYSE included those bonuses as compensation for the purpose of determining NYSE SERP benefits. Thus, SERP benefits were generally higher for NYSE executives than for similar executives at for-profit corporations."

"An analysis of Grasso's [Supplemental Executive Retirement Plan] benefits provided to the Compensation Committee in October 2002 by Vedder Price concluded that Grasso's SERP benefits exceeded the median SERP benefits for executives in his peer group by more than $100 million. Because many NYSE Directors did not understand the extent to which the compensation awarded to Grasso inflated his SERP benefits, they did not take those benefits into account when considering the total value of compensation awarded to him."

The Methodology

"The starting point for discussions about how much Grasso should be paid was a 'benchmark' that was the product of two factors: (i) the median compensation paid to the chief executives of a select group of companies (the 'Comparator Group'); and (ii) an assessment of the NYSE's performance. Grasso controlled the process that led to that assessment, and thus was able to manipulate it to ensure that it would result in an inflated benchmark that would become the starting point for discussions about his compensation. Notably, despite the inflated benchmark produced by this process, Grasso's compensation significantly exceeded that benchmark in the years that [Kenneth] Langone was Chairman of the Compensation Committee."

"Langone viewed this benchmark figure as merely a point of reference -- a starting point -- in fixing Grasso's compensation. However, because the Comparator Group was comprised of enormously large and complex financial services conglomerates, and because the compensation data collected from those companies included the value of stock options and other long-term incentive compensation, this starting point was substantially higher than it should have been."

"Not withstanding the effort and complexity of this methodology, it was wholly disregarded in calculating Grasso's compensation during Langone's tenure as Chairman of the Compensation Committee. This represented a departure from the NYSE's prior practice: during Grasso's first four years as chief executive, his compensation never exceeded the benchmark calculated on the basis of the Hewitt data. While Langone was the Committee Chairman, he provided Ashen with a recommendation for the amount to be awarded to Grasso. Ashen then met individually with the other Compensation Committee members in January to review the NYSE's performance during the prior calendar year and to discuss Langone's recommendation regarding Grasso's compensation."

NYSE Board Was Misled

"Not only was Grasso's compensation fixed in a manner that vastly exceeded even the 'benchmark' calculated by a flawed methodology, but information about two important components of Grasso's compensation and benefits was withheld from the Board. First, no disclosure was made to Board members by Grasso or Langone of the amount of Grasso's CAP awards, which totaled $18.5 million for 1999 through 2002."

"Second, no disclosure was made about the fact that a $6.6 million lump-sum payment of Grasso's SERP benefits under the 1995 Agreement and a transfer of $29.9 million in SERP benefits to his SESP account under the 1999 Agreement unlawfully enriched Grasso by providing him with an interest-free loan at a corresponding cost to the NYSE."

"In sum, Board members were not aware that Grasso received CAP awards equal to over $18 million for 1999 through 2001. Because N-PCL §715(f) required that Grasso's compensation be approved by a majority of the entire Board of Directors, more than $18 million of Grasso's compensation lacked the required Board of approval and is subject to recission."

The SERP Payments

"Grasso received a payment of his accumulated [Supplemental Executive Retirement Plan] benefits under the 1995 contract. The $6.6 million payment was unusual, because SERP benefits are typically payable only upon the executive's retirement."

"The payment of Grasso's accumulated SERP amounted to an interest-free loan from the NYSE. While Grasso would have to deduct the $6.6 million he received from the payment he would receive at retirement, he kept all interest earned on those funds during the intervening years. Accordingly, Grasso owes the NYSE the interest on the $6.6 million SERP benefit payment that he obtained in 1995."

"Pursuant to the 1999 Agreement, Grasso was also permitted to transfer $29.9 million in SERP benefits to his [Supplemental Executive Savings Plan] account where he could earn interest, even though he remained employed at the NYSE. Like the $6.6 million payment that Grasso received in 1995, the $29.9 million SERP-to-SESP transfer both imposed undisclosed costs on the NYSE and amounted to an illegal, interest-free loan to Grasso."

"In April 2001, Hewitt Associates, prepared a report that discussed, among other things, the effects that the expansion of the [Incentive Compensation Plan] benefit program would have on the SERP benefits accumulated by the NYSE's senior executives. … At that time, Grasso's lump-sum SERP benefit was nearly equal to the aggregate lump-sum SERP benefits to which all other SERP participants were entitled. Specifically, those executives had in the aggregate accumulated SERP benefits with a then lump-sum value of $93.6 million, while Grasso's accumulated benefit was at least $94.3 million."