NY court hears arguments in ex-NYSE head's pay case

By Holly McKenna

ALBANY, N.Y., June 3 (Reuters) - The state's highest court heard arguments on Tuesday about whether key parts of a lawsuit attempting to take back more than $100 million in pay awarded to former New York Stock Exchange boss Richard Grasso should be reinstated.

The New York Attorney General's Office wants the judges to allow it to pursue portions of its case that were dismissed by a lower court. But Grasso's lawyers argue that the Attorney General's office has overreached and that New York law does not give it the ability to pursue the claims.

"You couldn't have a more direct violation of separation of powers," Gerson Zweifach, a lawyer for Grasso, told the seven judges on the New York Court of Appeals in Albany.

Grasso, who ran the exchange for eight years, left in 2003 after an uproar over his $187.5 million compensation package. He was sued in 2004 by then state Attorney General Eliot Spitzer, a case now being pursued by Spitzer's successor, Andrew Cuomo.

Cuomo argues that Grasso's pay was unreasonable under the state's laws governing not-for-profit companies. At the time, the NYSE was a member-owned institution. It now is a publicly traded, for-profit company called NYSE Euronext (NYX.N).

Grasso contends his pay was fair and that he did nothing wrong. He was not present for Tuesday's court proceeding.

The appeals court did not indicate how it would rule. A decision is expected in about four to six weeks. The ruling is expected to be pivotal to what claims would be at issue at an eventual trial in state court in Manhattan.

During the oral arguments, the judges asked questions of both sides. In one exchange, Associate Judge Robert Smith asked New York Solicitor General Barbara Underwood, who represented Cuomo, whether in "your point of view, this is as though the New York Stock Exchange had overpaid its phone bill?"

"Grossly overpaid its phone bill," Underwood replied.

He went on to ask her why the state -- not the exchange itself -- would be the one to seek the return of the money.

"Well, that raises the special problem of the stock exchange, in which its members have a conflict of interest when it came to policing the management to prevent extravagant expenditures of this sort," Underwood replied.

If the lower court ruling stands, as Grasso has sought, Cuomo's office could have a tougher time proving its case at trial because it would be forced to prove that not only was the NYSE chief's pay unreasonable, but that he knew that was the case and tried to conceal his pay details from the exchange's board.

Some of the biggest names in the financial world could be called as trial witnesses, including U.S. Treasury Secretary Henry Paulson and ex-Bear Stearns chairman James Cayne, who both had been members of the NYSE's compensation committee. Another possible witness could be Spitzer, who resigned as New York state governor in March following a prostitution scandal. (Reporting by Holly McKenna; Writing by Martha Graybow; Editing by Gary Hill)