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Would You Buy Stock in This Man?

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Grasso was led to believe that he could settle with Spitzer if he returned $50 million. Later, that figure rose to $100 million, though no formal negotiations ever took place. The thinking on Wall Street was that Grasso would make a deal with Spitzer and avoid all the negative publicity, not to mention the legal expenses and the very real possibility of losing at trial. This would be the prudent Wall Street custom, and Grasso had an even greater incentive to stick to it: A judge, acting on a jury’s guilty verdict, could conceivably force Grasso to return the full $140 million, even though he has paid about $60 million in taxes.

But at great risk to both his already damaged reputation and possibly his own financial security, Grasso has chosen to fight. A settlement, he says, would be an admission that he did something wrong. “This is about my name,” he says. “It’s about my kids’ name. How would it look if I settled? It would look as if I did something wrong, and I didn’t.”

Grasso isn’t the only one concerned about his reputation, and people close to him say his behavior is best explained by his relationship with one man, Kenneth Langone. The head of the exchange’s compensation committee since 1999, the 70-year-old Langone is a large, boisterous man who amassed a huge personal fortune during a long career on Wall Street. He is now also facing charges from Spitzer for allegedly “deceiving” the stock-exchange board about an $18 million chunk of Grasso’s pay package. Langone not only has denied the charge but also has engaged in a furious war of words with the attorney general. There is genuine anger on both sides; at one point, Spitzer told Jack Welch that he wanted to “put a spike through Langone’s heart.” Langone has fought back by, among other things, bankrolling the long-shot campaign of Tom Suozzi, who is challenging Spitzer in the Democratic gubernatorial primary.

Langone has also put Grasso on notice not to settle the case, at least until he can clear his name. “I told Grasso if he settles, our friendship is over,” Langone told me and just about everyone else on Wall Street. Grasso has taken the message to heart. The last time he suggested settlement—in a stray comment made to CNBC last summer, just before a deposition—Langone got extremely angry with him, and Grasso quickly backed away.

Why exactly is Grasso so loyal to Langone? One plausible theory is that Grasso is counting on Langone’s help when he strikes out on his own and can’t afford to burn such an important rabbi. But it may come down less to what Langone will do for Grasso than what he already has done. Langone was Grasso’s greatest champion at the exchange, never backing away from his position that Grasso earned every penny of his salary. “It’s not that Kenny is covering his own ass because of his role; he really believes Grasso was worth the money,” says one Wall Street executive.

Langone officially scoffs at the notion that he won’t let his friend settle with Spitzer. “Oh, yes, I have a Svengali-like effect on Grasso,” he says with a laugh. But he won’t deny that he badly wants the case to go to trial, where he can confront Spitzer in public. And that means he needs Grasso in the fight as well.

During his eight-plus years atop the exchange, Grasso was beloved for a very obvious reason: He helped every major Wall Street firm make a ton of money. When he took over, the exchange, based on actual human traders, was thought to be an anachronism, sure to be eclipsed by the kind of electronic trading that the nasdaq offers. But Grasso tirelessly made the case that people could make an equally efficient and reliable market, overcoming advocates of electronic trading like Paulson. The biggest Wall Street firms, including Paulson’s Goldman, subsequently sunk billions of dollars into purchasing the specialist firms that do the actual trading on the floor. Grasso in turn became the custodian of their huge investment. “No one knows his product better,” James Cayne, the CEO of Bear Stearns, once told me.

“I was drop-kicked out the door,” says Grasso, “and now I have to prove that my career wasn’t a fluke.”

Grasso knew his product so well that most of Wall Street’s top brass did not wish to interfere with his management of the exchange. Grasso had to coax people like Cayne and Paulson to become board members, because compared with their day jobs, overseeing the exchange was a tedious chore. It’s fair to say, especially in light of what happened, that they didn’t always pay the closest attention to what was going on.

Until, that is, Grasso’s pay package began to cause a stir. For years, Grasso’s pay had been among the most closely held secrets on Wall Street. His compensation was set by a committee, headed by Langone, who took the job at the height of the bull market, when everybody was getting rich off Internet stocks and executive compensation had dimmed as a matter of public concern.


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