Coyote Blog

I guess it turns out that compensation deals between sophisticated, consenting adults at private firms are not actually subject to approval by the NY attorney general, no matter how much he grandstands:

A state appeals court on Tuesday dealt a devastating blow to the New
York attorney general's efforts to force ex-New York Stock Exchange
Chairman Richard Grasso to return a portion of his $187.5 million
compensation package.

New York Attorney General Andrew Cuomo's
spokesman issued a statement saying he is not pursuing an appeal in the
case. The Grasso case is "over" "¦ "for all intents and purposes," the
spokesman said.

In a 3-1 decision, the New York Supreme Court's
Appellate Division dismissed the two remaining causes of actions
against Mr. Grasso and one against former NYSE director Ken Langone

I wrote much more about this fiasco long ago...

Update:  The AG argues that their real concern was about pay practice in non-profits.  OK, I am sure there are any number of NGOs and museum presidents where there might be real issues with the sophistication of board members.  Go after those folks, then, but there was never, ever any evidence that somehow Dick Grasso pulled the wool over the eyes of financial neophytes on the NYSE Board, babes in the woods such as the CEOs of JP Morgan Chase and Goldman Sachs.  Unfortunately, all these other non-profits tend to be run by folks who are the backbone of the NY Democratic Party.  Even in the Grasso suit, Spitzer had to work a bit to avoid naming prominent Democrats as targets.  For example, there is a lot of evidence that the person most responsible on the NYSE baord for the structure of Dick Grasso's compensation contract was NYSE board member and former NY State Comptroller Carl McCall, but since he is a powerful Democrat, Spitzer did some slick judo to avoid including him in the suit, which still including other NYSE board members.

My novel BMOC included an incompetent and power-abusing Senator who managed to remain a darling of the press as long as he focused his attention on pork-barrel spending and using government power to help and hurt his friends and enemies.  However, the press finally turned on him when it became known he was involved with prostitutes.  The fairly cynical (if not realistic) moral was that it was fine to abuse government power, just don't get caught in a sex scandal.

Well, it seems that we will get to test that notion in real life.  Apparently, NY governor Eliot Spitzer has been dallying with prostitutes.  Now, I couldn't really care less about his purchase of sex -- I have argued many times for legalization of prostitution.  But it will be an interesting test of my book's cynical hypothesis, since to date the press has been in love with Spitzer despite (even because of) his abusive practices as AG and governor.  The radio news a few minutes ago actually said "Mr. Spitzer, who to date has had a squeaky clean reputation..."  Huh?  Only if you read the fawning PR work done for him by the NY Times in the past.

Update: Here is the passage from the book.  Sound familiar?

Taking a deep
breath, Givens said, "Senator, there is a reason that this one is not going
away. I will spell it out: S-E-X. The press doesn't give a shit about a few billion dollars of waste. No one tunes in to the evening news if the
teaser is "˜Government pays too much for a bridge, news at eleven.' The Today Show doesn't interview the
contractors benefiting from a useless bridge."

"However, everybody and his dog will tune in if
the teaser is "˜Your tax dollars are funding call girls, film at eleven'. Jesus, do you really think the CBS Evening
News is going to turn down a chance to put hookers on the evening news? Not just tonight but day after day? Just watch "“ Dan Rather will be interviewing
hookers and Chris Mathews will be interviewing hookers and for God's sakes
Barbara Walters will probably have a weepy interview with a hooker."....

"You guys in the Senate can get away with a lot,
as long as long as a) you don't get caught or b) the scandal is so boring or
complex that it won't sell newspapers. Hell, I saw a poll the other day that a substantial percentage of
Americans to this day don't understand or even believe what Richard Nixon did
was wrong. But if you polled those same
people, every freaking one of them would say that they knew and believed that
Bill Clinton got [had sex with] an intern.

Update #2: Disclosure -- I did not like Spitzer, even at Princeton.  This, however, was not uncommon.  In fact, Spitzer managed to inspire a jihad in response to his governance of the student council there.

Update #3:  ROFL!  I got this email from a reader:

I eagerly await your
comments on the latest imbroglio involving your favorite Princeton
classmate.  Please don't take the high road.

It seems I may not be the only person who does not care for Mr. Spitzer.

Update #4:  I hope the girls paid sales taxes on their transactions and have all their payroll taxes in order.  Certainly Mr. Spitzer has established the principle that illegal businesses still owe taxes.

That seems to be the axiom in New York these days, where Gov. Eliot L.
Spitzer (D), struggling to close a $4.4 billion budget gap, has
proposed making drug dealers pay tax on their stashes of illegal drugs.
The new tax would apply to cocaine, heroin and marijuana, and could be
paid with pre-bought "tax stamps" affixed to the bags of dope.

Update #5:  Libertarians like myself will point out that this is all between consenting adults.  Of course, that did not stop Eliot Spitzer from trying to prosecute Dick Grasso for a pay package that was approved by consenting (and quite sophisticated) adults.

Update #6: It is being reported that Spitzer will resign.  QED folks.  Spitzer uses the state police to spy on political rivals and the press continues to call him a squeaky clean reformer.  But pay for sex with a consenting adult, and your gone. 

Update #7:  Tom Kirkendal has been all over Spitzer for years.  He writes:

But I hope that the most important lesson that
Spitzer's political career teaches us is not lost amidst the glare of a
tawdry sex scandal. As with Rudy Giuliani
before him, Spitzer rose to political power through the misuse of the
state's overwhelming prosecutorial power to regulate business
interests. In so doing, Spitzer manipulated an all-too-accommodating
mainstream media, which never misses an opportunity to take down an
easy target such as a wealthy businessperson. Spitzer is now learning
that the same media dynamic applies to powerful politicians, as well. 

However, as noted earlier here,
where was the mainstream media's scrutiny when Spitzer was destroying
wealth, jobs and careers while threatening to go Arthur Andersen on
American Insurance Group and other companies? Where was the healthy
skepticism of the unrestrained use of the state's prosecutorial power
to regulate business where business had no available regulatory
procedure with which to contest Spitzer's actions?

This holiday season, several gasoline retailers found extortion notes from the state AG in their stockings.  In Illinois:

Illinois State Attorney General Lisa Madigan asked 18
operators whose prices jumped significantly after Hurricane Katrina to
donate $1,000 to the American Red Cross or risk a potential consumer
fraud lawsuit, reports the Chicago Tribune.

I would define consumer fraud as getting something from a retailer different than was promised.  I am not sure how it is fraud if retailers put their prices on a great big sign right on the street, and then actually charge those prices as promised.  Unfortunately, we seem to have filled positions of political power with the economically ignorant, who are stuck on cost-based pricing:

"When we're in an emergency situation, such as we were,
retailers have the obligation not to increase their prices to the
general public over what wholesalers are charging them," Hagan told the
Associated Press.

Uh, why?  Retailers move their markup around all the time.  Most every retailer has drastically higher markups on December 1 for Christmas tree ornaments than they do on December 27, but no one seems to complain.  Workers increased the price of their labor post-Katrina, sometimes by a factor of three, and their costs weren't going up at all, so why weren't they gouging?  Its just bizarre how we treat gasoline so much different than every other product we buy.  Perhaps its because they are the only retail product that actually posts their current prices right on the street. 

As I read this article, AG Hagan reminded me of my least favorite Aspiring Governor, fellow Princetonian and enemy-of-Antarctica Eliot Spitzer.  So it was funny when the article continued on to discuss similar actions taken by Spitzer.  This was the quote I loved:

Spitzer told the Press & Sun-Bulletin that
he "hoped it would send a clear message to others that 'you cannot,
under New York law, use an environmental emergency to raise prices.'"

OK, but can I use a massive supply-demand imbalance caused by an environmental disaster to raise prices?  And I sure bet that politicians can use an environmental emergency to raise taxes  (in fact, since NY's gas tax is a percentage of the price rather than fixed, the state of NY did indeed contribute to the post-Katrina price hike). 

Here is my quote back to Mr. Spitzer:

"I hope to send a clear message that the state Attorney General position cannot be used for grandstanding forays against innocent but unpopular business entities* in order to raise one's profile to run for higher office"

*See Dick Grasso, Microsoft, et al.

Update:  More at Professor Bainbridge on Elito Spitzer  (and here)

Last week, Tyco's Dennis Kozlowski was found guilty of looting the shareholder's assets for his own personal gain.  Good.  Too many CEO's treat public companies as their own, rather than other peoples' companies for which they have fiduciary responsibility.  And, unlike the Dick Grasso mess I commented on earlier, this was a much clearer case of looting as opposed to just negotiating themselves a good deal.  (update:  Stephen Bainbridge has a different take here)

According to the Wall Street Journal, which requires a subscription:

The guilty verdicts are in for L. Dennis Kozlowski and Mark H. Swartz. For Tyco International Ltd., the company they looted, there may be more court dates to come.

Tyco was hit with dozens of shareholder lawsuits in
2002 and 2003 as the company disclosed waves of accounting problems
that sank its stock. It has restated results several times, going as
far back as 1998. A July 2003 restatement cut about a billion dollars
from pretax profit over several years.

The convictions
lend credence to the plaintiffs' allegations that Tyco was grossly
mismanaged. The suing shareholders already have a strong leg to stand
on: Tyco's string of past restatements amount to an admission that its
accounting was deeply faulty. Shareholders claim they were deceived by
accounting practices that presented rosy pictures of the performance of
the company and its acquisitions, then suffered losses following the
revelation of allegations against Mr. Kozlowski and the restatements.

I have never been able to justify most lawsuits by shareholders against companies in which they own shares.  Any successful verdict would effectively come out of the pockets of the company's owners who are.. the shareholders.  So in effect, shareholders are suing themselves, and, win or lose, they as a group end up with less than if the suit had never been started, since a good chunk of the payout goes to the lawyers.  The only way these suits make financial sense (except to the lawyers, like Bill Lerach) is if only a small subset of the shareholders participate, and then these are just vehicles for transferring money from half the shareholders to the other half, or in other words from one wronged party that does not engage in litigation to another wronged party who are aggressively litigious.  Is there really justice here?

OK, you could argue that many of these shareholders are not suing themselves, because they are past shareholders that dumped their stock at a loss.  But given these facts, these suits are even less fair.  If these suits are often made by past shareholders who held stock at the time certain wrongs were committed, they are paid by current and future shareholders, who may well have not even owned the company at the time of the abuses, and may in fact be participating in cleaning the company up.  So their argument is that because the company was run unethically when I owned it, I am going to sue the people who bought it from me and cleaned it up for my damages?  Though it never happens, the more fair approach would be for current shareholders to sue past shareholders for the mess they left.

The vast majority of these suits are dreamed up by attorneys for the benefit of attorneys.  They help shareholders not at all.

Postscript: There are a couple of circumstances where these suits are entirely justified.  The two that come to mind are:

• Suing a particular group of shareholders who somehow got disproportionate rights in the company or disproportionately benefited financially at the expense of other common shareholders.  A good example would be suing the Rigas family at Adelphia Communications for hosing the minority shareholders.  Note, however, I am talking not about suing the company, but suing certain owners who abused minority shareholders to their benefit.
• Suing to modify certain governance rules that are seen to be unethical or illegal.  I would hope this would be a last resort after trying a number of proxy fights and other remedies, but this can in certain circumstances be the last protection of minority shareholders abused by the majority.

Aspiring Governor, self-proclaimed substitute for the SEC, and enemy of Antarctica Eliot Spitzer is about to start a criminal trial against Dick Grasso, former head of the NY Stock Exchange (NYSE). 

And I have no idea why. 

Certainly it has something to do with Mr. Grasso's pay, which Mr. Spitzer thinks was too high.  The NYSE, for those who may be confused, is a private institution owned by some of the richest and supposedly financially savviest people in the country.  The owners or seat-holders select a board of directors, who in turn approved Mr. Grasso's pay package.  I imagine that there are folks who think that the stock exchange is a public institution or uses public money, but it is not and does not, though it does have some quasi-regulatory responsibilities.

The best I can figure it, Mr. Spitzer is arguing that Mr. Grasso somehow tricked these babes-in-the-woods on the board, which include naive and inexperienced people such as CEO's of Fortune 50 companies, heads of investment banks and brokerage firms, and a former US Secretary of State.  Now, I can imagine that the government might have an interest if Mr. Grasso somehow cooked the books to inflate his pay fraudulently.  In fact, the director of HR has admitted he did not give the board all the relevant information, but board members have already said that they did not rely on this person for their information.  Remember that most of the folks on the board themselves get paid in a similar league as Mr. Grasso's pay, so most saw it as a competitive offer, at least until negative publicity caused all the cockroaches to run for cover.

So Mr. Spitzer is starting criminal proceedings against people who he thinks negotiate too well for themselves or are paid more than they are worth.  I am sure glad he wasn't doing this 15 years ago.  I remember getting hired as a new Business school grad at McKinsey & Co. as a consultant for some ridiculous amount of money, and thinking "I can't be worth that!  I don't know anything!  Are they really paying me to tell experienced CEO's what to do?"  Boy, what panic I would have had if I had known there was an AG out there looking to send overpaid people to jail!

The WSJ has a really fascinating editorial that I will link to, though a paid subscription is required (update:  Try this link instead, it may get you there free or maybe here).  The overall picture is one of, if there was a crime at all, the wrong people are on trial.  Here is a taste:

In early June of 2003, when the
membership of the [NYSE] compensation committee changed, the Webb interviews
begin to tell a story of wider board dysfunction. And if there was a
screw loose in this new operation it appears to be not Mr. Langone --
who by all the interview accounts ran a tight ship -- but his
successor, [former New York State Comptroller Carl] McCall. This is a vital point, given that Mr. Spitzer, a
fellow Democrat, did not name Mr. McCall in his lawsuit. What toppled
Mr. Grasso was not the $139 million payment the board approved in
August of 2003 but the later news that Mr. Grasso was owed $48 million
more. Many board members said they didn't know about this payment and
for that many blame Mr. McCall.

The interview notes are rife with comments that Mr.
McCall had little inclination or ability to understand the contract he
took over negotiating. An outside consultant, William Mischell, said
that when he and Mr. Ashen explained the contract to Mr. McCall, "the
meeting . . . lasted somewhere between 15 to 30 minutes, with McCall
making or taking phone calls throughout and not really focusing on the
details." Mr. McCall himself told investigators that "the subject of
executive compensation was entirely foreign to him" -- yet he refused
offers of help to explain the contract to others. When asked why Mr.
McCall was chosen to chair the committee rather than someone more
knowledgeable, Mr. Karmazin told the Webb team that it was an "image
thing" (the NYSE had just instituted new governance standards).

Mr. McCall's excuse for not giving directors
"additional details" about the $48 million or other aspects of the
contract -- which were clearly stated in the text -- is that "he was
not aware of any." That's because, as he admitted, he didn't read the
full document, even before he signed it. Moreover, at least one
director, Van der Moolen's Mr. Fagenson "asked McCall twice to make
certain that all pension plans and other plans were going to terminate
on this date, but stated he never received any updates from McCall on
these issues."

As Mr. McCall went to brief the full board on Aug. 7,
2003, he was given talking points that referenced the extra $48 million
but didn't read these or tell the board. J.P. Morgan Chase CEO William
Harrison noted that Mr. McCall "did not appear to understand the
proposed payout very well. . ." Avon CEO Andrea Jung noted that "McCall
struggled" and that "others were more able to answer questions." Mr.
Karmazin described Mr. McCall as "flustered," and said he did a
"horrible job" of explaining the numbers. Leon Panetta, former Clinton
White House chief of staff, speaking of a later McCall performance, was
blunt: "Carl knew nothing."

The article sums up the Board this way:

The board, which was often
dysfunctional, was stocked with celebrities from diverse
constituencies, many of whom didn't understand the NYSE or take their
responsibilities seriously. Former New York State Comptroller Carl
McCall, who brought Mr. Grasso's contract to fruition, was viewed by
his colleagues as incompetent and, in the words of Goldman Sachs CEO
Henry Paulson, not "financially sophisticated." Former Secretary of
State Madeleine Albright felt she shouldn't "question" the pay; Bear
Stearns CEO James Cayne admitted he "tuned out" of the pay proceedings;
and Van der Moolen Vice Chairman Robert Fagenson suggested the only
real concern was "how this was going to reflect on the Board."

But the interviews also make clear that more astute
board members, such as Mr. Langone, former Viacom President Mel
Karmazin, and former Merrill Lynch Chairman David Komansky, took it
upon themselves to understand Mr. Grasso's contract, and offered strong
arguments for why they'd paid him as they had. "We knew what we were
doing when we paid him. We did it purposely, and we believed it was the
right compensation," Mr. Komansky said in his interview

In this environment, Grasso is culpable, how?