Oct. 19 (Bloomberg) -- Richard Grasso, the former chairman of the New York Stock Exchange, was ordered to return at least $36.5 million to the Big Board, the biggest setback yet in his battle to keep $190 million in disputed pay.

In a victory for New York Attorney General Eliot Spitzer, State Supreme Court Justice Charles Ramos said today that Grasso must surrender loans of $6.6 million and $29.9 million he took against his retirement benefits in 1995 and 1999, plus interest, and part of an additional $58 million in payments he received in 2003. Spitzer sued Grasso in 2004 to recover pay he claimed was ``not approved or reviewed'' under laws governing non-for-profit organizations.

``It may be that Ramos is trying to push the parties toward a settlement,'' said James Fishman, a law professor at Pace Law School in White Plains, New York, who specializes in non-for- profit organizations. ``It may be a message to Grasso. The question is how tone deaf he is.''

The 72-page decision also denied Grasso's claims that he was terminated by the NYSE, entitling him to damages, and that he was defamed by John Reed, who succeeded him as chairman of the exchange. Ramos rejected Grasso's argument that Spitzer has no grounds to bring the suit because the exchange converted into a for-profit company earlier this year.

The decision didn't spell out exactly how much money Grasso must return, though Ramos said Grasso, 62, is entitled to keep part of the $58 million payment. Spitzer's office calculated the total owed at about $100 million.

Appeals Court

Grasso said the ruling was ``riddled with errors,'' according to an e-mailed statement.

``Ramos somehow rejected the testimony of dozens of directors that they approved every dime they paid me, and decided that these men and women did not know what they were doing,'' the former NYSE chairman said in the statement. ``Ramos recently wrote that he takes comfort from the fact that the appellate division will review his rulings. So do I.''

Ramos told lawyers earlier that he's trying to settle all legal questions so the state appeals court considering the case can resolve them together. Gerson Zweifach, a lawyer for Grasso, said his client will appeal Ramos's decision today.

In his ruling, Ramos said Grasso failed to disclose some of his retirement benefits to the NYSE's board, breaching his fiduciary duty under the exchange's then-status as a not-for- profit. Grasso, who was chairman and chief executive officer at the exchange from 1995 until September 2003, claims all the $190 million was approved by the exchange's board.

`Right Result'

Michael York, a lawyer representing the NYSE at Washington- based Wehner & York PC, said ``the judge reached the right result in his ruling'' by denying Grasso's claims against the exchange and Reed.

By 1999, Grasso's Supplemental Executive Retirement Plan, or SERP, was worth $36 million.

``Mr. Grasso's failure to disclose the amount of the SERP thwarted the NYSE's compensation committee from performing its duty of care and obedience,'' Ramos wrote in his ruling. ``Year after year, it made decisions to pay him without knowing his true compensation.''

Ramos's decision was a response to motions for summary judgments by both parties, who sought to resolve a number of claims without a trial. Judges can rule on claims without a trial if there are no facts in dispute. Lawyers preparing for a trial have gathered more than a million pages of documents from the stock exchange and secured testimony from 60 executives and former board members.

`Ultimate Issue'

``A trial must be held on the ultimate issue of whether Mr. Grasso's compensation was unreasonable,'' Ramos wrote.

Grasso received $6.6 million from his SERP account in 1995 and transferred the $29.9 million into a separate Supplemental Executive Savings Plan, or SESP, account in 1999. Upon leaving the exchange in September 2003, Grasso received a total of $87.9 million -- the $29.9 million plus the additional $58 million -- from the SESP account.

Ramos said Grasso must return part of the $58 million ``to the extent it was not vested and not due to be paid to Mr. Grasso until his termination.'' He left it to the parties to decide how much of that amount was earned compensation.

Grasso also claimed he's owed $48 million plus interest in severance because he was ``involuntarily terminated'' from the NYSE. Ramos said that Grasso, after being asked for his resignation, could have refused.

``Instead, for reasons best known to him, Mr. Grasso agreed to resign,'' the judge wrote. Of Grasso's claim of defamation, Ramos said, ``No malice can be found'' in Reed's statements.

The Spitzer pay case is New York v. Grasso, 04-401620, New York Supreme Court, New York County (Manhattan).

To contact the reporter on this story: Patricia Hurtado in New York state Supreme Court at pathurtado@bloomberg.net.

Last Updated: October 19, 2006 19:47 EDT