A Rare Misstep By Eliot Spitzer

Eliot Spitzer, New York State Attorney General, is the investor's hero. He has led the charge in ending conflicts of interest on Wall Street, cleaning up the mutual funds industry, and curbing excessive CEO pay. But in going after former New York Stock Exchange Chairman Richard A. Grasso to retrieve $100 million in compensation, Spitzer is stepping into a potential conflict of interest of his own making. His case is misguided, misdirected, and likely to tarnish Spitzer's own political future. Here's why:

By most measures, Grasso's nearly $200 million in compensation as CEO of the NYSE is wildly excessive. But who is responsible for giving it to him? Spitzer's answer is that Grasso and Kenneth Langone, the former chairman of the NYSE's compensation committee, misled the NYSE board and tricked it into giving Grasso an outsized pay, pension, and bonus package. Spitzer is suing Grasso and Langone to get much of the money back but is giving a total pass to the NYSE's board. But the notion of Bear Stearns (BSC ) head James E. Cayne, Goldman Sachs (GS ) CEO Henry M. Paulson Jr., and former New York State Comptroller Carl McCall being naive, indifferent, or stupid victims of Grasso's and Langone's deceitful manipulations is simply beyond belief. These are smart, tough men. It was their decision to pay Grasso like the CEO of a big global financial institution rather than like the administrator of a nonprofit foundation. Not prosecuting the board undermines Spitzer's case.

Worse, Spitzer, a Democrat, is thinking of running for New York State governor in 2006 and is preparing a large fund-raising campaign. Much of this money will be raised on Wall Street, perhaps from firms led by the very same men Spitzer is choosing not to prosecute. McCall, in addition, is a prominent state Democrat who could be vital to Spitzer's political future. Spitzer's decision not to include these board members in his lawsuit clouds his case with the appearance of conflict of interest and is unseemly at best.

Then there's the matter of the law. Spitzer is suing Grasso under New York State Not-For-Profit Corporation Law, which says that an officer's compensation should be "reasonable" and "commensurate with services performed." But there are two types of nonprofits. Type B nonprofits, such as religious, educational, and scientific institutions have singular public missions. Type A nonprofits, such as trade associations, country clubs, and consumer coops are private and are responsible to their owners.

The NYSE is something of a hybrid. It regulates itself, but there's no denying that its seat-holding members, especially the specialists, make enormous profits. Grasso was paid to defend their interests. The law is not at all clear on what is "reasonable" here.

Spitzer has our respect for all that he has done to reform the financial industry and protect the little guy. But his case against Grasso is ill-considered.

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