For almost three years, Wall Street has been anticipating a major courtroom showdown that would pit "The Enforcer," New York Attorney General Eliot Spitzer, against famed defense attorney Brendan Sullivan in the Dick Grasso over-compensation case. But CNBC has learned that one of the consequences of a recent ruling is that Grasso will lose Sullivan as his attorney once the trial begins sometime next month.

The move comes after State Supreme Court Judge Charles Ramos moved up the trial date of the case to September 5 from October 30, putting what will likely be a six-week courtroom battle in the middle of another case Sullivan is already committed to: The third retrial of former Cendant chairman Walter Forbes by the US Attorney's office in New Jersey.

Grasso is being charged by Spitzer of violating the state not-for-profit law after being awarded a $140 million pay package that led to his resignation as Chairman and CEO of the New York Stock Exchange back in 2003. The law states that the compensation of officials who work at not-for-profits must be reasonable and commensurate with duties performed. Spitzer wants Grasso to return as much as $100 million to the stock exchange, which was a not-for-profit entity before it became a public company earlier this year. The Attorney General also charged former NYSE compensation committee chairman Ken Langone with deceiving the NYSE board on a chunk of Grasso's pay package.

Both Grasso and Langone have mounted a vigorous defense in the case, claiming they've done nothing wrong and that Grasso's pay was fully disclosed to the NYSE board. In fact, Grasso told CNBC that he will be well-represented in the case by one of Sullivan's partners at his firm Williams & Connolly, Gerson Zweifach, who has been handling much of the nitty-gritty of the case including taking depositions and appearing at pre-trial hearings.

In fact, one of the ironies of the ruling last week is that while Langone and Grasso said they have no problem with the new court date, the attorney general's office said the new date may pose problems. Spitzer's lead attorney in the case, Avi Schick, told Judge Ramos that the new date doesn't give the attorney general's office enough time to prepare for what's going to be one of the most closely watched cases on Wall Street in years. Nearly every major Wall Street CEO has served on the board of the stock exchange, and many are expected to be called as witnesses, including former Goldman Sachs CEO and current Treasury Secretary Hank Paulson.

But there may be another reason why Spitzer wants a delay in the trial date; the September 5^th court date comes just days before the Democratic campaign for governor. The expected six-week trial will take place during the height of the New York State gubernatorial race to be decided on election day, November 7. At least for now, Spitzer is considered the front-runner, so the last thing he needs is a high profile defeat in the middle of the campaign. 

Spitzer's political priorities could be one reason why Grasso says he isn’t concerned about losing Sullivan and having Zweifach as his lead attorney. "They wont face Cy Young," Grasso told CNBC, "but they will face Warren Spahn, who by the way had a better winning percentage".

Charles Gasparino - CNBC

Senate Judiciary Committee Chairman Arlen Specter is ramping up
his investigation of hedge funds by calling on SEC Chairman Christopher Cox for a private meeting to discuss what he believes is the agency's poor record in cracking down on fraud and abuse in the business, CNBC has learned.

The meeting, which could take place as early as next week, comes after a former SEC investigator, Gary Aguirre, said he was fired from the commission when he tried to take testimony from Morgan Stanley CEO John Mack in an investigation of possible insider tradingby the large hedge fund Pequot Capital. Aguirre has said that Mack was the possible leaker of insider information to Pequot, a charge that Mack denies, and one that at least initially the commission didn't take seriously.

But the SEC recently did an about-face, and has now called Mack to give a deposition in the Pequot case. CNBC has learned that Mack will give his testimony next week, and according to people close to the case, the SEC is concluding its investigation into Pequot. Mack's testimony will be one of the final official acts before the commission decides whether to drop the case or file charges, these sources add.

Specter is expected to question Cox on a number of issues involving Aguirre's investigation, but also the broader issue of how well the commission investigates hedge funds, according to people close to the matter. These people say that while Aguirre doesn't appear to have a smoking gun that points to Mack violating insider trading laws, Specter believes that the agency erred in not taking Mack's testimony earlier, and will likely point that out during the meeting.

One interesting point: Specter's foray into hedge fund regulation could set up a nasty political battle between the Senate Judiciary Committee and the Senate Banking Committee, which has direct oversight of the SEC.

Lawyers for former Brocade Communications CEO Greg Reyes are working overtime to prevent their client from being the first casualty of the burgeoning federal investigation into backdating stock options. CNBC has learned that just last Thursday they made a detailed power-point presentation to the US Attorney’s Office in the Northern District of California which laid out key points in their defense, including their contention that Reyes didn't personally benefit from the backdating and their opinion that Reyes is "a good guy."

As CNBC was first to report, Reyes is likely to face civil charges by the Securities and Exchange Commission in its investigation of stock-options back dating. The SEC's enforcement division has issued a Wells Notice to Reyes informing him that the staff has recommended to the full commission that he should be charged in the matter. While the full commission may decide not to bring charges, such moves are rare, and even attorneys for Reyes concede that the SEC will likely file a civil case in days or weeks.

The big question is whether Reyes, who resigned from Brocade more than a year ago, will be charged criminally by the US Attorney's office. Lawyers and representatives for Reyes say that last week they made a last-ditch attempt to get prosecutors to back off during a lengthy power-point presentation made to the US Attorney in San Francisco. According to people with direct knowledge of the presentation, Reyes' lawyers argued that he had little accounting knowledge - he was predominantly a salesman, and even though he had control over the granting of options, Reyes wasn’t conscious of the fact that he was doing something potentially illegal. Further, his attorneys claimed that Reyes relied on the accounting expertise of the company’s CFO and audit committee to serve as a check in his options granting practices.

    The Securities and Exchange Commission is ready to pull the trigger on its first stock-option backdating case, CNBC has learned.

       People at the SEC as well as several defense attorneys representing targets of the wide-ranging probe say that the commission will file its first case within a month. Although there are around 400 cases of backdated stock options that have caught the SEC’s attention, and about 60 under more intense scrutiny, these same people say one case is at the top of the SEC’s list. That case involves Greg Reyes the former high-flying CEO of technology company Brocade Communications.

Reyes resigned from Brocade more than a year ago, after the company announced an earnings restatement stemming from how it accounted for stock options. Since then he has received what’s known as a “Wells Notice” from the SEC, meaning that the commission’s staff is recommending that the agency file civil fraud charges against him over backdating of options. The full-commission must approve the staff’s recommendation before charges are filed, but attorneys working for Reyes believe that a civil case against Reyes is extremely likely given the tenor of some recent meetings with the SEC.

A bigger question is whether Reyes will face a criminal indictment as well. The US Attorney’s office has joined the SEC in a joint investigation of Reyes’ actions, and Reyes’ attorney, according to people with knowledge of the matter, recently met with prosecutors from the US Attorney’s office from the Northern District of California to stave off an indictment of their client.

How did they do? People close to the Reyes defense team say they are cautiously optimistic that the US Attorneys office may back off from brining a criminal case even if the SEC files a civil case against Reyes, as is expected in the coming weeks.

The controversy surrounding backdating of stock options has been at the top of the SEC’s enforcement agenda for more than six months. Stock options are designed to align the compensation of employees with their company’s performance. They give the holder the ability to purchase stock at a strike price at some future date. A lower strike price allows the employee to make more money if and when shares of the company’s stock rise. The strike price is usually set at the date the stock option is granted.

But if an executive can change the date of the strike price - move it back to a day when the shares are actually lower -- the benefits could be tremendous. The SEC and the Justice Department are investigating whether companies and their top executives committed civil and possibly criminal securities fraud by manipulating these dates.

While Reyes’ actions have clearly caught the eye of civil and criminal authorities, his actions also show that many of these cases are far from cut-and-dry. In a recent meeting with officials from the US Attorney’s office, his lawyers made several compelling points. First, that whatever actions Reyes took, he did not do so for self-enrichment, as has been alleged in other cases. They told prosecutors that Reyes’ action benefited company employees, “including low-employees, staff and secretaries,” according to one person with direct knowledge of the meeting. Because of this, they argued, there is scant evidence that Reyes’s actions showed criminal “intent,” a necessary element of any prosecution.

Reyes, they argued had wide discretion to set the date of the option to any point he wanted.