May 20 (Bloomberg) -- New York Attorney General Eliot Spitzer plans to sue former New York Stock Exchange Chief Executive Officer Richard Grasso next week to recover some of his $139.5 million pay package, a person familiar with the situation said.

The suit would rely on Spitzer's authority to regulate not- for-profit organizations such as the NYSE and accuse Grasso of breaching his duty to oversee the world's biggest stock exchange. Spitzer may also sue some of the exchange's former directors who approved Grasso's pay, the person said.

The suit, anticipated for months, will probably refocus attention on potential conflicts that led to Grasso's ouster in September following the disclosure of his pay. Some of Wall Street's top executives, whose firms were subject to NYSE regulation, approved Grasso's contracts.

``People will ask, `How did it happen and how do we prevent it from happening again?''' said Charles Elson, director of the University of Delaware's Department of Corporate Governance.

In the past three months, the Securities and Exchange Commission, which has worked with Spitzer, has subpoenaed former NYSE directors. Among them were Morgan Stanley Chief Executive Philip Purcell and Lehman Brothers Holding Inc. Chief Executive Richard Fuld, who sat on the NYSE's compensation committee. Lehman Brothers spokeswoman Hannah Burns declined to comment. Morgan Stanley spokesman Ray O'Rourke and didn't return phone calls.

`No Negotiations'

Brendan Sullivan, Grasso's attorney, wrote in February that the 35-year exchange employee wouldn't return any money. In a letter to the exchange's current chairman, John Reed, Sullivan said the compensation committee was made up of ``some of the most independent-minded and experienced hands in corporate America.'' They unanimously approved Grasso's contracts.

Eric Starkman, a spokesman for Grasso, said the deposed stock exchange chief hasn't sat down for settlement discussions with Spitzer or the NYSE.

``There have been no negotiations,'' Starkman said. ``Nothing has changed since Brendan Sullivan sent his February 26 letter.''

Spitzer spokesman Brad Maione declined to comment. NYSE spokesman Ray Pellecchia also declined to comment.

In the one interview Grasso has given since being ousted, Grasso told Newsweek this month that he wants the exchange to apologize for ``destroying'' his reputation.

When Reed, a former Citigroup Inc. co-chairman, was recruited in September to take over the exchange, he commissioned Chicago lawyer Dan Webb to write a report on Grasso's pay. After it was completed, Reed said Grasso, 57, harmed the exchange and asked Spitzer and the SEC to recoup some of his predecessor's ``unreasonable compensation.'' Reed hasn't released the report.

Conflicts

Institutional investors and exchange members said there was a conflict of interest in the way Grasso's pay was decided, because the NYSE's regulatory unit, which reported to Grasso, policed the firms that helped set his pay. Since Reed's restructuring of the exchange in November, NYSE regulators report to a committee of the board of directors that's free of securities firm leaders.

Spitzer, 44, whose office reviewed Webb's report, said on Jan. 13 that the facts surrounding Grasso's pay were ``troubling.'' Investigators sought memos, notes and letters discussing the pay agreements from former directors. Reed had demanded that Grasso return at least $120 million.

Spitzer will sue under New York's not-for-profit law, which requires executives and directors to exercise duties ``of care and loyalty'' to an organization.

After Grasso received the $139.5 million, board members persuaded him last September to forego an additional $48 million. Sullivan wrote that Grasso is prepared to countersue for another $50 million if his client is sued. He called the exchange's treatment of Grasso ``shameful.''

Grasso dropped out of college to join the U.S. Army and started at the exchange as a clerk in the listings department in 1968. He worked his way up the Big Board hierarchy under John Phelan, chairman and CEO from 1984 to 1990. Grasso was named to the top job in 1995.

To contact the reporter on this story: Philip Boroff in New York pboroff@bloomberg.net

Last Updated: May 20, 2004 15:11 EDT