At Behest of AIG Chief, Grasso Pushed NYSE Firm to Buy Stock

By Kate Kelly and Susanne Craig

1,389 words

3 October 2003

The Wall Street Journal

A1

English

(Copyright (c) 2003, Dow Jones & Company, Inc.)

Former New York Stock Exchange Chairman Dick Grasso pressured a major Big Board floor firm to increase its purchases of shares of giant insurer American International Group Inc. after Mr. Grasso received written complaints from AIG Chairman Maurice "Hank" Greenberg, according to people familiar with the matter.

The unusual move involving buying of one of the Big Board's largest stocks raises questions about whether Mr. Grasso favored AIG because of Mr. Greenberg'sprevious role as an NYSE director and member of the board's compensation committee. Mr. Greenberg was on the NYSE's compensation committee when the controversial employment contract that ultimately led to Mr. Grasso's ouster was developed and approved.

In an Oct. 23, 2002, letter to Mr. Grasso, Mr. Greenberg complained that the "specialist," or NYSE floor-trading firm responsible for keeping orderly markets in AIG stock, needed to commit more of its own money to buy AIG shares, which had been volatile. People familiar with the matter say that on a number of occasions after receiving complaints like this from Mr. Greenberg, Mr. Grasso would subsequently go to the NYSE trading floor and suggest that the AIG specialist, Goldman Sachs Group Inc.'s Spear, Leeds & Kellogg unit, buy more AIG shares to prevent Mr. Greenberg from moving his company to a rival exchange. Spear would then step up its buying of AIG shares, temporarily stabilizing the stock, the people said. Such purchases were costly for Spear, resulting in roughly $14 million in trading losses on AIG shares for the specialist firm over the past couple of years, and additional losses in previous periods, the people say.

The 211-year-old Big Board uses the specialist system to provide liquidity, or ease of trading, in its listed stocks. Each specialist firm serves as a market maker in specific assigned stocks, matching buy and sell orders from investors. When buyers and sellers can't agree on a price, specialists are required to step in with their own capital to buy or sell shares to facilitate trading.

Any additional buying by Spear of AIG shares could have artificially boosted the insurance company's shares.

Mr. Grasso, 57 years old, was ousted two weeks ago as NYSE chief after an outcry over his retirement pay that totaled $187.5 million, including a $48 million future retirement package, which he said initially he would forgo.

Through a representative, Mr. Grasso declined to comment.

Edward Kwalwasser, NYSE's executive vice president for regulation, said he was unaware of any conversations between Mr. Grasso and Spear. He says the exchange receives about 560 letters a year from firms questioning trading in their stocks. Such concerns, whether sent to Mr. Grasso or others, typically are routed to the NYSE's market-surveillance unit, which would then investigate the matter.

Mr. Greenberg, 78, confirms that he wrote the letter and has criticized the NYSE specialist system for years, but he shrugs off any conflict in requesting greater risk-taking on Spear's part. "If I think the specialist is not doing the job he should be doing in buying stock when the stock is under pressure . . . then I'm going to complain," Mr. Greenberg, who served on the NYSE board and compensation committee from 1996 to mid-2002, said in an interview. He said it would be wrong to "read something sinister" into his actions. "I expect as a listed company to have the exchange do what it's supposed to do," Mr. Greenberg said. "I will do whatever's right for shareholders of AIG."

A Goldman spokesman said: "As the specialist, we commit capital to facilitate orderly trading and this involves the assumption of risk. We do this for all our clients."

It's unclear whether there was a market need for Spear to buy the AIG shares at the time. But some NYSE floor members say any such intervention by an exchange chief isn't the norm. "In 16 years as a member, I've never seen management of the stock exchange come down and specifically talk to a specialist about complaints by [a] company as to their market making on the floor," says Robert McCooey, who runs the brokerage firm Griswold Co.

The disclosure comes amid a continuing exchange investigation into the practices of the floor's elite specialists. The exchange is examining whether some specialists, including Spear, Leeds, stepped between valid buyers and sellers of stock to make trading profits for themselves, rather than for investors. Among the dozens of stocks that have been scrutinized in the investigation is AIG, according to a person familiar with the matter. The specialists say they have done nothing wrong.

With respect to AIG, Spear could have rebuffed Mr. Grasso's suggestions to buy additional stock during price declines if the specialist firm believed it was inappropriate. But Spear, according to people familiar with the trading, chose not to, concerned that the loss of a blue-chip name such as AIG would be a blow and negatively impact its ability to win other important corporate clients in the future. However, the Goldman spokesman said that Spear was "acutely conscious" of the need to fulfill its responsibilities and believed it always acted appropriately. Spear is the exchange's second-largest specialist firm, making markets in about 600 stocks.

Mr. Greenberg's Oct. 23, 2002, letter was part of a string of complaints he made about trading in AIG shares over the years. "Look at the last two weeks or 10 days of trading in our stock," Mr. Greenberg said in the letter, which was reviewed by The Wall Street Journal. "The specialist's position is either short or so minimal. This is utterly unsatisfactory . . . . I can do much better on another Exchange," wrote Mr. Greenberg, who left the NYSE board in June 2002. "The ball is in your court."

AIG shares rose in the wake of Mr. Greenberg's letter -- though it isn't clear how much can be attributed to Spears's trading. On Oct. 23, 2002, AIG shares traded at $63.05. The next day, after the insurance company reported strong earnings, AIG's stock rose $1.11, or 1.8%, as the broader Dow Jones U.S. insurance index fell 0.5%. But by Oct. 31, AIG shares had slipped back to $62.55, a drop of 0.8%. (The Dow Jones industry index fell 2.7% during that time.)

In late November, AIG shares began to decline. In December 2002, Mr. Greenberg again wrote to Mr. Grasso. "I don't believe the . . . market they are making" is adequate, Mr. Greenberg wrote. "Size does matter, and capital commitment size matters." His complaints persisted over the course of the next year, the people familiar with the matter say.

Mr. Greenberg's grievances about the AIG specialist go back a long way. In 1992, AIG was reassigned from a previous specialist firm to Spear after the NYSE had discussions with the previous specialist "concerning its performance," the Big Board said at the time. And several times in recent years, Mr. Grasso visited the exchange floor and suggested that Spear buy more AIG shares, says someone close to the matter. Sometimes, Mr. Grasso would merely relay Mr. Greenberg's dissatisfaction with the trading, this person says; other times, he personally would encourage the specialist to buy more stock or risk losing the AIG assignment.

Meanwhile, the complaints were awkward for Goldman, Spear's parent. AIG was an important investment-banking client that had relied on Goldman for a number of merger deals and debt offerings over the years, contributing millions in banking fees. But Spear's trading of AIG on the floor was becoming costly, forcing a greater investment in the AIG shares than in any other issuer client, according to a person familiar with the trading. Goldman acquired Spear for $6.5 billion in late 2000.

Even though a specialist has obligations to keep markets orderly, "he's not obliged to go beyond those duties because someone told him to do so," says Roy C. Smith, a former Goldman partner and now professor at New York University. "To force somebody to do that would be a mutinous act."

--- Theo Francis contributed to this article.