The ghost of Eliot Spitzer hung over the courtroom this afternoon as New York's solicitor general asked the state's highest court to revive an effort to strip former New York Stock Exchange chairman Richard Grasso of some of his $185 million compensation package.

At issue is whether the state has the authority to intervene in the matter of Grasso's pay just because the NYSE was a nonprofit institution at the time stock exchange directors approved his compensation package.

An appellate court ruled that the state doesn't have that authority unless it can prove that Grasso acted in bad faith, and the seven members of the Court of Appeals appeared unlikely to disagree with that view today.

Losing this appeal would make it even harder for Andrew Cuomo, Spitzer's successor as Attorney General, to win at trial -- especially since Spitzer, who initially brought the case, was so widely criticized for judicial overreach even before he was discredited by his involvement with a prostitution ring in March.

With their skeptical questions this afternoon, the judges seemed to suggest that the Spitzer was trying to have his cake, and eat it too, in the lawsuit against Grasso.

Spitzer had sought return of the money in his role as "parent" of the citizens of the state of New York, and image that, given relevations of his extra-curricular activities, now seems absurd.

Some claims are based on New York's law on nonprofit corporations, and others are not. But Grasso's lawyer argued before the court that all of the claims stem from the nonprofit corporation law, which requires proof of "bad faith" on Grasso's part at any upcoming trial seeking return of the money.

"They can prove he got a lot of money, but that is not enough," Grasso's lawyer, Gerson Zweifach of Williams & Connolly, told the judges, according to the Associated Press. "It's not how much he got. It's whether under all the circumstances he acted in good faith and with reasonable prudence."

The world has changed a lot since Spitzer filed his case in May 2005: For one thing, the NYSE has merged with Euronext and is now a for-profit entity, not the not-for-profit corporation on whose behalf Spitzer sued. So where would the money go, should the A.G.'s suit be successful?

Barbara Underwood, who argued the case on behalf of Cuomo, explained that the NYSE's "regulatory arm" remains a nonprofit. "There is a complication that arises out of the change in the structure," she admitted.

The "state as parent" doctrine is usually invoked on behalf of the downtrodden, a fact pointed out by several judges. "Aren't you suing on behalf of one pretty well-heeled victim?" asked Judge Robert S. Smith, not really looking for an answer.

But that was just the start of the difficult questions. The suit against Spitzer presses six claims, among them a claim for "unjust enrichment" under the attorney general's authority as "parent" to pursue claims as guardian of the people.

Underwood argued that such a claim "doesn't require" proof of "fault on the part of the person enriched. But the not-for-profit corporation law, the very law that Spitzer was supposed to have invoked with such flair, requires a finding of "bad faith" or breach of the duty to exercise "reasonable prudence." The appellate division ruled that the state must meet this burden in any future trial.

While many people were shocked by Grasso's compensation, the fact is that the stock exchange's directors signed off on it. In other words, they exercised their business judgment, and a suit against them should be based on a breach of that fiduciary duty.

"What's left of the business judgment rule if we adopt your theory?" asked Judge Susan P. Read.

Smith added: "From your point of view, this is as the exchange had overpaid its phone bill."

Underwood countered: "Grossly overpaid."

The questioning became more ominous for the state in the last five minutes of Underwood's argument, which came after Grasso's lawyer had his say. Chief Judge Judith S. Kaye came back to the question of the business judgment rule:

"How do we know that the legislature intended to abrogate the business judgment rule?" Kaye asked.

Underwood tried to explain that the unjust enrichment claim had nothing to do with the obligations of directors. Grasso just has to give the money back, she said, as if he'd "found it on the sidewalk" or it was the result of "typographical error."

By then, Grasso's lawyer had done his best to make sure that the ghost of Spitzer was rattled in the courtroom.

"The heart of their claim is a violation of the statute," Zweifach said of the nonprofit corporation law. "The legislature was tenacious in insisting upon codifying the business judgment rule. Can the attorney general jettison all of it?"

The not-for-profit corporation law makes it clear there shall be no liability for excessive compensation without fault, Gerson argued, "and the A.G. cannot just go 'poof'" and make it go away.

Gerson then twisted his knife by accusing the attorney general's office of "trying to disregard the legislature's choices."

Some in the current legislature would see shades of Spitzer in that line.

by Karen Donovan