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Wall St. Fails to Learn Its Lessons

September 14, 2003|Tom Petruno | Times Staff Writer

The New York Stock Exchange and the mutual fund industry seem to be in a competition this month: Which one can trigger more serious outrage from the investing public?

The exchange has stunned even some of its own members with revelations about the size of Chairman Richard Grasso's compensation package.

The fund industry, meanwhile, may have answered the question some exasperated investors were asking last year in the aftermath of the scandals involving brokerage analysts, Enron Corp., WorldCom Inc. and other onetime market stars: "What other ways could they possibly devise to rip us off?"

We found out on Sept. 3, when New York Atty. Gen. Eliot Spitzer filed a court complaint detailing one private investor's illegal or improper trading in mutual fund shares that was allegedly facilitated by the fund companies themselves.

A year ago, one line of discussion on Wall Street was that "scandal fatigue" had set in: Investors were so wearied by the wave of corporate and brokerage frauds that the outrage pool had been nearly drained.

Coincidence or not, major stock indexes reached their bear-market bottoms last Oct. 9.

This time around, the stock market overall doesn't appear to be terribly distraught over the NYSE's leadership crisis or the fund scandal. Key indexes fell modestly last week, but they're still up month to date and are hanging on to their hefty gains achieved since mid-March.

If investors stop to think about these latest Wall Street fiascoes, however, they may find themselves even more disgusted than they were by the despicable conduct of corporate executives in last year's bumper crop of frauds.

For one, in the cases of both the NYSE pay flap and the mutual fund trading abuses, it would seem that the parties involved learned absolutely nothing from the other debacles that have stained the images of corporate America and the financial services industry in recent years.

Public anger over huge executive compensation packages has been bubbling over since 2000, as investors have lost trillions in stock market value while many executives have continued to receive giant pay awards.

One might think that the NYSE, as a principal regulator of the nation's biggest companies, would want to lead by example on matters of corporate governance. In that context, investors may wonder if the NYSE board stopped to consider how it might look to the outside world if Chairman Grasso's pay package were to become public, as it finally has (only after extreme pressure put on the exchange by the media and the Securities and Exchange Commission).

Grasso's total compensation rocketed from $11.3 million in 1999 to $25.5 million in 2001, even as stock prices -- and the fortunes of many NYSE member brokerages -- plummeted.

What's more, the 57-year-old exchange chief was guaranteed to receive $48 million more between now and 2007. Last week, amid a growing firestorm over his pay, he announced that he would forgo that extra sum.

It's interesting to note that the NYSE, which is owned by its member brokerages, has in recent years entertained the notion of selling stock to the public to raise capital. Given that Grasso's pay would look enormous compared with most public companies, marketing an initial public stock offering might have proved challenging, to say the least.

Exactly how much Grasso should be paid is a subjective issue, of course. "He does a fantastic job," said Jonathan Macey, a securities law expert at Cornell University. "How much does he deserve? I don't know, but it's a lot."

Grasso broke no laws in taking what the board gave him. But the NYSE ought to know something about the importance of public perceptions and the dangers inherent in damaging investor confidence.

In fact, the exchange's own Statement on Ethics reads in part as follows: "All policies and practices of the NYSE and all NYSE-related conduct and activities of Exchange employees must be in absolute accord with protecting and preserving the integrity of the exchange."

To the media, if not to the public at large, the NYSE has long had a reputation for arrogance. That theme surfaced again last week, when reporters asked to see documents detailing Grasso's pay agreements.

NYSE officials allowed reporters to come to the exchange to view the 1,200 pages of documents but would not permit them to make copies and would not post the documents on the Web.

As for Grasso's future, he has adamantly insisted that he wouldn't resign his post.

The possibility of keeping employment wasn't open for a number of Bank of America Corp. executives last week.

They were dismissed by the bank after being named by New York's Spitzer in the court complaint exposing trades made by hedge fund Canary Capital Partners in some BofA mutual funds, under the Nations Funds brand name, from 1999 to July of this year.

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