NEWSWEEK has learned that Grasso is planning to file sometime in the next two weeks a lawsuit against the NYSE’s current chairman, John Reed, for an alleged violation of a non-disparagement clause in Grasso’s contract. People close to Grasso say the former chairman will likely seek an unspecified amount of damages, though it could amount to tens of millions of dollars, which Grasso has said he would give to charity if he wins the case.

At issue for Grasso: Statements made by Reed in an interview, as well as in an NYSE press release, shortly after Grasso stepped down as the exchange’s chairman amid a firestorm of controversy surrounding his massive pay package in 2003. Reed, a former co-CEO of Citigroup, took over the top job at the exchange after the NYSE fired Grasso and immediately appointed a high-profile attorney, Dan Webb, to investigate Grasso’s pay deal.

According to people close to Grasso, that’s where the problems began. The lawsuit could cite a statement by Reed, made to The New York Times, where he described the findings of Webb’s report as “embarrassing.” In the same news story, Reed said he wanted Grasso to return more than $100 million of the money he collected from the exchange.

The lawsuit could also refer to an NYSE press release announcing that Reed had asked New York Attorney General Eliot Spitzer and the SEC to investigate the findings of the Webb report. In that press release, Reed said that after reading the report, the NYSE board had concluded that “serious damage has been inflicted on the exchange by unreasonable compensation of the previous chairman and CEO and by failures of governance and fiduciary responsibility that led to the compensation excesses as well as other injuries.” (Spitzer recently filed a civil suit against Grasso to recover more than a $100 million of the pay deal under a New York State law that governs the pay of officials at not-for-profit entities, like the NYSE)

People close to Grasso say both statements step over the line because Grasso’s contract with the NYSE contained a “non-disparagement clause,” which in their opinion prevents Reed or any NYSE official from attacking the former Big Board chairman. “Reed should have kept his mouth shut,” said one person close to Grasso. This person added that if Grasso does prevail in any suit against Reed, the damages that the former chairman intends to donate to charity will mean the current NYSE chairman “will be putting a lot of poor kids through college.”

To be sure, no suit has been filed yet, and Grasso’s attorney, Brendan Sullivan, could opt for another legal strategy than one that targets Reed. Still people close to the former NYSE chairman say a draft of the suit has been prepared, and could be filed over the next two weeks. The final suit, these people say, could also cite different examples of Reed’s statements than what now appears in the draft.

Meanwhile, Grasso’s legal team has until July 23 to file their answer to Spitzer’s civil case. Grasso is also preparing to sue the stock exchange for breach of contract for failing to pay another $48 million Grasso says the exchange still owes him.

A spokesman for Reed said “we think there’s no actual or legal basis for this claim.” The spokesman added that “anybody who looks at the facts or the law could come to the same conclusion. Hopefully, his counsel looks at this case carefully because there’s no basis for it.”

A spokesman for Grasso declined comment.

The lawsuit against Reed would be the latest chapter in the simmering controversy over Grasso’s pay package. Grasso told NEWSWEEK in an exclusive interview published in the magazine’s May 17 edition that he plans to go to “war” with the exchange to keep the money, which he says was approved by the NYSE board comprising Wall Street’s top executives. Since then, Grasso has faced a new enemy in Spitzer, who, after being asked by Reed to investigate the pay deal, recently filed a civil suit saying that Grasso’s package violated a New York State law which states that the compensation for officials of not-for-profit organizations must be “reasonable.”

Grasso has fired back at Spitzer in an newspaper editorial discussing his achievements during his 35 years of service at the NYSE, and labeling Spitzer’s lawsuit political, as he gears up for a possible New York gubernatorial run in 2006.

Meanwhile, John Coffee, a professor of law at Columbia University, said a case against Reed may be an uphill battle-mainly because the NYSE, not Reed “was a party” to the Grasso contract. In addition, Coffee says Reed could argue that “he has fiduciary duties to communicate what he believes are critical issues for the NYSE.”

Still, Coffee says there may be good reasons for Grasso, and his high-powered legal team, led by Brendan Sullivan, to target Reed. “I’m not saying this is beyond argument,” Coffee said, adding that Grasso may also want to embarrass Reed as well by naming him as a defendant. “This is a mud fight,” Coffee said. “I think Mr. Grasso wants Mr. Reed in the case so he can be cross examined.”

If a suit is filed, whatever Reed might say is unlikely to be the last word in an increasingly vitriolic case.