April 24 (Bloomberg) -- Kenneth Langone, head of the New York Stock Exchange's compensation committee when it approved a $190 million pay package for then-Chairman Richard Grasso, lost a bid to have a New York state lawsuit against him dismissed.

A state appeals court in Manhattan today rejected the motion by Langone, 72, co-founder of Home Depot Inc. Last year, the same five-judge panel threw out four of six claims in the suit by the New York attorney general. The court ruled the state lacked the authority to sue Langone or Grasso on behalf of the NYSE.

Eliot Spitzer, the former New York governor and attorney general, sued the two men in 2004. He accused Langone, a NYSE director, of misleading board members about Grasso's pay. Today's ruling allows the case to proceed toward trial.

``The issue of whether Langone breached his duties to the board and to the exchange is fact-based and cannot be determined on the record before us,'' a three-judge majority wrote.

The state claims Grasso's pay was unreasonable under state laws governing not-for-profit organizations. In arguments on Langone's appeal in October 2006, a panel of judges repeatedly cited documents they said backed his claim that NYSE directors had a sophisticated understanding of Grasso's pay.

``I think your adversary is pretty persuasive that members of the board here weren't exactly rubes,'' Justice James McGuire told then-Deputy Attorney General Avi Schick at the 2006 hearing. ``Do you agree the board members weren't financial rubes?''

`Not Rubes'

``You're right, Justice McGuire, they were not rubes, but they devoted just one day every other month to the New York Stock Exchange,'' Schick replied. McGuire was one of two judges who dissented. Under court rules, the 3-2 margin allows Langone to challenge the ruling before the New York Court of Appeals in Albany, the state's highest court.

Gary Naftalis, Langone's lawyer, had argued that, while his client wasn't obliged to inform the committee about Grasso's pay, ``the undisputed record and facts show he had.''

He declined to immediately comment on the ruling.

New York State Attorney General Andrew Cuomo took office when Spitzer became governor. A spokesman for Cuomo didn't immediately return a call seeking comment.

Spitzer accused Langone of breaching his fiduciary duty as part of the lawsuit.

``Langone had the responsibility to make compensations recommendations which were in the interest of the NYSE, in good faith and with `conscientious fairness, morality and honesty in purpose,''' the appeals court wrote today.

Spitzer quit his post as governor earlier this year following allegations about his use of prostitutes.

The case is New York v. Grasso, 04-401620, New York Supreme Court, Appellate Division, First Department (Manhattan).

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

Last Updated: April 24, 2008 15:50 EDT