In order to force a former New York Stock Exchange chief to hand back his $187.5 million pay package, the state will now have to prove a much more difficult case than Governor Spitzer anticipated when he sued in 2004.

A midlevel appellate court in Manhattan yesterday threw out four of the six counts that Mr. Spitzer, then attorney general, had brought in a suit claiming that Richard Grasso’s pay was unreasonably high coming from a not-for-profit corporation, which the NYSE was at the time. As a result of the decision, the attorney general’s office must now do more than convince a jury or judge that the pay was objectively unreasonable. If the decision stands, lawyers for the state must also prove either of two more difficult points: that Mr. Grasso himself believed his pay was excessive or that he got it improperly.

The 3–2 decision places Mr. Grasso on much safer legal ground than he found himself on last year, when a judge ruled that he must return a large chunk of his compensation package. In last year’s decision, a lower trial court judge, Charles Ramos, found Mr. Grasso had breached his fiduciary duty to the stock exchange in securing his pay. Yesterday’s ruling appears to nullify much of Judge Ramos’s opinion.

With the state suffering such a severe setback three years after filing the case, it would appear to be a good time for a settlement. But for reasons not directly related to Mr. Grasso, that seems unlikely, a law professor said.

Yesterday’s decision questioned the attorney general’s authority to enforce portions of the state’s nonprofit corporation law. Thus, Attorney General Cuomo’s priority in the case may have shifted to appealing to get back his powers to police nonprofits from going after Mr. Grasso’s money.

“This will greatly trouble the attorney general because he historically has had this authority to monitor not-for-profits,” a law professor, John Coffee, who directs the Center on Corporate Governance at Columbia Law School, said. “The effect of this is not just on the Grasso case, but on his entire authority over not-for-profit corporations.”

The attorney general’s office will appeal the decision, a spokesman, John Milgrim, said, declining to comment further on the ruling. An appeal to the Court of Appeals in Albany will likely delay any move forward in the case for six months at a minimum.

Several other issues in the case remain unresolved, including whether Mr. Grasso is entitled to a jury trial, rather than a bench trial, and which judge would preside.

A lawyer for Mr. Grasso, Mark Zauderer of Flemming Zulack Williamson & Zauderer LLP, declined to comment on the ruling yesterday.
Mr. Grasso rose from a position as a clerk at the stock exchange to its chairman in 1995, a job he held until 2003, when he stepped down amid disclosures over the value of his pay package.

Mr. Spitzer has contended that Mr. Grasso failed to keep the exchange’s board members appraised of how much the exchange would owe him upon retirement. Mr. Grasso has denied this, arguing that board members were aware of his pay.

The majority decision yesterday, written by James McGuire, does not address any of these claims, instead focusing only on whether the attorney general has standing to bring suit against nonprofit corporations in compensation disputes. The court rejected the attorney general’s claim that the office had common law authority to bring such suits. The decision throws out the four counts — out of a total of six — in which New York’s Not-for-Profit-Corporation law did not explicitly authorize the attorney general to sue.

While many of the dismissed counts overlap and are repetitive, one clearly stands out. This crucial count would have required Mr. Grasso to reimburse the exchange if the state proved that his pay was not “reasonable” or “commensurate with the services performed,” according to the decision.

Had the state won that point, Mr. Grasso might have been required to return a portion of his pay even if at trial he proved that the board understood every payment to him and that he believed himself to be worth every penny of the compensation package.

“Neither knowledge of the unlawfulness of the payments nor any state of mind, fault-based or otherwise, on the part of an officer or director is required under the Attorney General’s view of his authority,” the majority said. Judge McGuire was joined by judges John Buckley and Bernard Malone Jr.

The two counts upheld by the court require the state to prove that Mr. Grasso knew his compensation was unreasonable or that he failed in his duty to manage the stock exchange’s assets.

In a dissent, Judge Angela Mazzarelli expressed concern that the court was greatly limiting the attorney general’s oversight of nonprofits.

“This is a case with far-reaching state and national economic implications,” Judge Mazzarelli, who was joined by Judge David Saxe, wrote. “It is my view that the Attorney General has standing, under its broad parens patriae power, to protect the State, by protecting the NYSE, from a loss of public confidence because of allegations of serious mismanagement.”

Judge Mazzerelli said the importance of the stock exchange in America’s economy demands that it is a “proper subject of the Attorney General’s concern.”