Mr. Spitzer's broadside against the financial engine of American business promises to extend one of the most difficult periods in the Big Board's storied 211-year history. It also puts into sharp relief a question that is at the core of the debate over corporate governance: How much executive pay is too much? For some, the American dream means earning as much as possible, and many chafe at the notion of the government setting caps on pay. Mr. Spitzer portrayed his suit as a frontal assault on high executive compensation and it promises to refocus attention on the volatile issue.

"This case demonstrates everything that can go wrong in setting executive compensation," he said, including the "lack of proper information, the stifling of internal debate, the failure of board members to conduct proper inquiry and the unabashed pursuit of personal gain." The suit doesn't demand that Mr. Grasso return a specific amount, but Mr. Spitzer said he wants "well over $100 million."

Legal experts said they were surprised by the breadth of the evidence in the suit, some of which was gathered by U.S. Securities and Exchange Commission investigators. "If you take at face value the allegations that key information was not given to the board, it is a strong case," said Michael Zuppone, a New York-based securities lawyer.

The complaint accuses Mr. Grasso, as the NYSE's chief regulator, of leaving some board members with the impression that if they opposed his pay packages, it would be at their peril. One unnamed board member from Wall Street told investigators that Mr. Grasso "confronted" him after he expressed concern about his proposed 2000 pay to a staffer, the suit says. The member voted in favor of that year's package and later recalled thinking, "Thank God I escaped that one. This man was also our regulator [so] you have to be careful," the suit says.

It also alleges that Mr. Grasso took actions that benefited firms run by executives determining his compensation, at one point calling the National Association of Securities Dealers on behalf of Mr. Langone as the regulatory organization was investigating his boutique investment bank, Invemed. The NASD eventually sued the bank for improperly sharing profits with favored clients but not Mr. Langone. A NASD spokeswoman said Mr. Grasso's call took place "after the complaint was finalized."

Mr. Grasso said in a statement: "I'm disappointed that New York's attorney general has chosen to intervene in what amounts to be a commercial dispute between my former employer and me. I look forward to a complete vindication in court and fully expect that my fellow NYSE directors and I will be adjudicated to have acted completely in accord with our fiduciary responsibilities and always in the best interests of the exchange." Under New York law, Mr. Grasso has 30 days to respond formally to the allegations; a trial could be a year or more away.

Mr. Langone insisted in a statement that his compensation decisions were "diligent and sound" and that Mr. Spitzer was grandstanding from a "very shaky soapbox." The NYSE said in a statement that it is "supportive of Attorney General Spitzer's efforts in this matter," but declined to comment further on the suit because it is named as a defendant.

Wall Street for months has anxiously awaited the outcome of Mr. Spitzer's investigation. It began with the results of an internal NYSE investigation, which were handed to Mr. Spitzer. After new leadership was installed, the exchange subsequently asked Mr. Grasso to return $120 million. Numerous Wall Street figures, hoping to avoid the legal showdown that began yesterday made repeated efforts to encourage Mr. Grasso to make a settlement, but he refused, insisting that even returning a dime would be an admission of wrongdoing.

A big break for Mr. Spitzer came in the form of last-minute settlement agreements with two key players in the Grasso saga who are now obliged to testify against him: Frank Z. Ashen, former head of human resources at the NYSE and Mercer Human Resource Consulting, a unit of Marsh & McLennan Cos. that advised the exchange on retirement compensation. Both admitted to providing board members with inaccurate or incomplete information about Mr. Grasso's pay. Mr. Ashen agreed to return $1.3 million of the $9 million he was paid in recent years by NYSE, and Mercer will give back the more than $400,000 it received for advising the NYSE in 2003.

Mr. Ashen "recognizes, in hindsight, that certain mistakes were made," but he never intentionally provided inaccurate information to directors, said Bruce Yannett, his attorney. A spokeswoman for Mercer said its work for the exchange "was limited" and that the firm settled with regulators "solely to put this matter behind us."

According to the suit, Mr. Ashen omitted significant information about compensation Mr. Grasso was getting from a pension-like retirement program from documents he used to brief board members about the total size of his pay package. Yet he included those figures in documents sent to NYSE officials in charge of cutting checks to Mr. Grasso, the suit adds. At another point in the process, when Mercer helped calculate the amount of Mr. Grasso's accrued retirement pay, its presentation to the board was flawed in a way that resulted in Mr. Grasso getting more money.

In all, the Big Board's directors voted to give Mr. Grasso upwards of $200 million -- $139.5 million he pocketed in 2003 for work done in previous years, $48 million that he was promised in additional pay, $9.7 million in potential severance pay and a $12 million payment that the suit says was "hidden" from the board. Last year, the NYSE board was informed that $18.5 million of Mr. Grasso's retirement pay had already vested and should be given to him immediately, according to the complaint.

One benchmark for determining Mr. Grasso's annual pay was a score he would give himself for the NYSE's regulatory activities in a given year, Mr. Spitzer said yesterday. Although the scoring scale was meant to be between 1 and 10, 10 being a great performance, Mr. Grasso one year rated himself a 13, helping to ensure maximum compensation, Mr. Spitzer said.

At the same time, some of the consultants hired by the exchange to advise the board on compensation matters were giving bad advice, the complaint alleges. For instance, in 2002, when Mercer was asked to help calculate the amount of Mr. Grasso's accrued retirement pay, its presentation to the board was based on a faulty assumption that in effect substantially inflated the NYSE chief's nest egg.

Write to Kate Kelly at kate.kelly@wsj.com¹⁷ and Susanne Craig at susanne.craig@wsj.com¹⁸