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PEOPLE OF THE STATE OF NEW YORK v. GRASSO

December 8, 2004.

PEOPLE OF THE STATE OF NEW YORK, Plaintiff,
v.
RICHARD A. GRASSO, KENNETH G. LANGONE, and THE NEW YORK STOCK EXCHANGE, INC., Defendants.



The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

The Attorney General of the State of New York ("AG") brings this action in New York State Supreme Court against the New York Stock Exchange ("NYSE") and its former Chairman and Chief Executive Officer, Richard A. Grasso, alleging that the NYSE violated New York's Not-for-Profit Corporation Law by paying Grasso compensation that was not "reasonable" and "commensurate with services performed" as required by the law. See N.Y. Not-for-Profit Corp. Law § 202(a)(12). Grasso removed the case to this Court, and the AG now moves to remand the case to the state court. The motion will be granted.*fn1

FEDERAL JURISDICTION

  Grasso asserts that this action is removable under two different statutes. First, 28 U.S.C. § 1441(a) permits defendants in state-court actions to remove "any civil action . . . of which the district courts have original jurisdiction." Original federal question jurisdiction, in turn, is tested under the "well-pleaded complaint rule," which provides that a lawsuit is "founded" on a federal claim or right only where the federal claim appears on the face of the complaint. "The rule makes the plaintiff the master of the claim; he or she may avoid federal jurisdiction by exclusive reliance on state law." Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). A federal issue raised by defendants as a defense will not suffice to warrant removal. Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 808 (1986).*fn2 Nevertheless, a plaintiff "may not defeat removal by omitting to plead necessary federal questions in a complaint," Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 22 (1983). Similarly, "[i]f the plaintiff's statement of his or her state-law claim in a well-pleaded complaint `necessarily depends on resolution of a substantial question of federal law,' then the `case may also arise under federal law.'" Bracey v. Board of Educ., 368 F.3d 108, 113 (2d Cir. 2004), quoting Franchise Tax Bd., 463 U.S. at 28, and Barbara v. NYSE, 99 F.3d 49, 54 (2d Cir. 1996). But under these rules, "original federal jurisdiction is unavailable unless it appears that some substantial, disputed question of federal law is a necessary element of one of the well-pleaded state claims, or that one of the . . . claim[s] is `really' one of federal law." Franchise Tax Bd., 463 U.S. at 13.

  Second, 28 U.S.C. § 1442(a)(1), "[t]he United States or any agency thereof or any officer (or any person acting under that officer) of the United States . . ., sued in an official or individual capacity for any act under color of such office" may remove such an action to federal court. Removal under § 1442(a)(1) requires three elements: (1) the removing defendant is or acted under the direction of a federal agency or officer; (2) he has a colorable federal defense; and (3) there is a causal connection between the conduct in question and the federal directive. Mesa v. California, 489 U.S. 121, 133-34 (1989); Willingham v. Morgan, 395 U.S. 402, 406-09 (1969); see In re Methyl Tertiary Butyl Ether Products ("MTBE") Liability Litigation, No. M21-88, MDL No. 1358 (SAS), ___ F. Supp. 2d ___, 2004 WL 515535, at *6 (S.D.N.Y. Mar. 16, 2004).

  While these two provisions have distinct requirements, and must be analyzed separately, there is substantial similarity and overlap between them as applied to this case. In each case, the existence of federal jurisdiction over the case turns in substantial part on the characterization of the AG's complaint. The AG contends that the action is a garden-variety (if high-profile) suit by the State of New York against a not-for-profit corporation incorporated under its law to enforce requirements of that law governing the substantive and procedural propriety of compensation paid to its officers. Grasso, however, pointing to the NYSE's role as a federally-regulated stock exchange and self-regulating organization under the federal securities laws, argues that the suit is "really" an attack on Grasso's and the NYSE's actions as a federal regulator and regulatee. Thus, before turning to an analysis of the legal standards applicable under each of these removal statutes, it is necessary to examine in detail the allegations of the complaint.

  THE COMPLAINT

  The opening paragraph of the complaint sets forth the essence of the AG's claim. After noting that New York law requires that compensation paid to officers of not-for-profit corporations be "reasonable," the complaint charges that Grasso's compensation "violate[d] this principle" because it was
(i) objectively unreasonable; (ii) the product of a process that permitted Grasso improperly to influence both the amounts awarded to him and the members of the [NYSE] Compensation Committee and Board of Directors who were required to approve those awards; and (iii) approved by the . . . Board . . . based upon materially incomplete, inaccurate and misleading information.
(Compl. ¶ 1.) The complaint thus charges that Grasso's compensation (amounting to a total of nearly $190 million during his eight-year tenure) was both substantively excessive (subparagraph i) and the product of procedures that were flawed both structurally (subparagraph ii) and specifically in reference to the decision on his compensation (subparagraph iii). Based on the factual allegations underlying this tripartite claim, the complaint sets forth eight causes of action against Grasso, the NYSE, and Kenneth G. Langone, a former NYSE director and chairman of the Board's Compensation Committee, all premised on state law — eight claims under the Not-for-Profit Corporations Law and two under New York common law. As thus summarized, it is not apparent that the complaint states any claim under federal law or implicates any question requiring the interpretation of federal law. The AG charges the defendants with violations of various principles of New York statutory and common law. The basic allegation is that the compensation paid to Grasso was unreasonable, both because it was objectively excessive, and because it was the product of a process that was infected with conflict of interest (in that Grasso was in a position to influence the actions of those who would decide on his compensation) and misrepresentation (in that the Board that voted it was provided with inaccurate information). No reference is made to federal law, and it is difficult to see how federal law could play any role in deciding the case. No principle of federal law must be referred to in order to decide how much compensation is reasonable under New York corporation law, or whether compensation voted by directors who were misinformed or not truly independent violates the principle of reasonable compensation embodied in New York law. Nor is there any apparent reason to believe that federal law shields the payment of excessive compensation, or authorizes compensation to be voted by conflicted or uninformed directors of state corporations.

  The complaint goes on to elaborate the specifics of its claims in fifty-four pages of factual allegations and legal claims. Like the opening paragraph, the factual allegations fall into three parts. A substantial portion of the complaint is devoted to setting forth the nature and amount of Grasso's compensation, which was certainly ample. Nearly seven pages of the complaint, comprising twenty paragraphs, is consumed simply by setting forth the terms of the various compensation provisions, including salaries, bonuses, incentive plans, and benefits of various kinds, and analyzing those provisions in relation to other facts purportedly supporting the AG's contention that the compensation was in itself excessive and unreasonable. (Compl. ¶¶ 32-51.)*fn3 Another five pages, comprising seventeen paragraphs, is devoted to setting out and criticizing the methodology purportedly used to set that compensation. (Id. ¶¶ 52-68.)

  The principal section of the complaint on which Grasso relies in arguing that the case presents questions of federal law is the second, which is headed "The NYSE Governance Structure and Grasso's Regulatory Authority Over the NYSE's Directors Created Actual and Apparent Conflicts of Interest." (Id. ¶¶ 25-31.) This section, consisting of only seven paragraphs, refers to the NYSE's role in regulating member firms, and Grasso's power, as the operational head of the organization, to investigate and take action against them. According to the complaint, these powers, which derive from federal law, gave Grasso so much authority over member firms that Board and Compensation Committee members who are subject to the NYSE's regulatory power inherently had reason to fear Grasso, and thus were conflicted in voting on his compensation. The complaint charges that Grasso actively manipulated the compensation process, and exploited these conflicts of interest, by appointing to the Compensation Committee directors whose firms were regulated by the NYSE. This in essence is the structural procedural defect set forth in subparagraph ii of the opening paragraph of the complaint.

  Moreover, in addition to setting forth the abstract conflict, the complaint goes on to allege that Grasso actually utilized or failed to utilize his regulatory authority to reward compliant members of the Board. In particular, the AG charges that Grasso ensured the approval of a transaction proposed by Merrill Lynch, whose CEO served on the Compensation Committee (Compl. ¶ 26), and failed to act against the scandalous conflicts of interest infecting equity research analysis provided by major NYSE member firms, whose executives also served on the Committee (id. ¶¶ 29-31). These paragraphs are the centerpiece of Grasso's argument that this case is really about the propriety of Grasso's or the NYSE's actions as a federal regulator.

  Finally, the complaint extensively details the allegation that the NYSE Board was misled by the withholding of information concerning certain bonuses and fringe benefits payable to Grasso. (Compl. ¶¶ 69-156.) While Grasso highlights this section also as implicating federal interests (D. Br. 3-4), there is little on the face of the complaint to support that claim. These paragraphs describe highly technical provisions of Grasso's compensation, the process by which those provisions were proposed to the Board, the information that was provided to the Board, and the AG's various allegations that critical information was withheld and that the information provided was misleading in various ways. Nothing in these paragraphs turns on the federal functions exercised by Grasso or the NYSE; the description of the benefits and the Board's deliberations could be a story about any corporation in the country.

  ...


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