It sounds just like a page right out of Chicago politics, except rather than registering the dead to vote, cable TV giant Cablevision (NYSE:CVC) has admitted that it granted stock options to a director after his 1999 death.
According to the quarterly financial report the cable operator filed yesterday, the internal probe of its stock-option-granting practices, begun in early August, had uncovered numerous instances of "backdating" -- retroactively setting an option's grant date to an earlier time, usually when the price is lower. (Aside from its instance of posthumous generosity, the company also improperly granted options to a compensation consultant hired by the company as if he had been an employee, among other incidents.)
As reported in the online edition of yesterday's Wall Street Journal, the deceased director was Marc Lustgarten, who started with the company in 1975 as assistant general counsel, but quickly assumed greater and more diverse roles at the cable giant. He was president and CEO of Cablevision's Rainbow Media Holdings, which owns such cable channels as American Movie Classics, IFC, and WE: Women's Entertainment; he was vice chairman of Cablevision; and he became chairman of Madison Square Garden, which owns basketball's New York Knicks and hockey's New York Rangers. He also had a hand in Cablevision's purchases of The WIZ and Clearview Cinema Group.
It was unclear from the filing which of Lustgarten's options were granted after his death and subsequently backdated. The Journal noted that in its 2000 proxy statement, Cablevision said it had granted options to four senior executives with a grant date of Aug. 2, 1999 -- four weeks before Lustgarten's death. But at the time, the company did not name him as one of the executives receiving the options. Other filings show that Lustgarten had received 400,000 stock options between 1997 and 1999.
In all, the company said it had backdated options issued between 1997 and 2002, granting nearly 3 million stock options to at least five executives during those years. As a result of the probe, Cablevision restated its financial results from 2003 to 2005, along with the first quarter of 2006, ultimately slicing more than $89 million from the company's profits.
The backdating scandal has touched more than 100 companies, resulting in the criminal indictment of several executives from Brocade Communications (NASDAQ:BRCD), the first such cases to arise from of the scandal. It has also finally laid bare the lie that stock options are used simply to align shareholder and management interests.
A stock option is the right to purchase a stock at a predetermined price at some time in the future. Generally, if the fortunes of the company rise, so will the stock price, increasing the option's value. That's why options' proponents say they align management's and shareholders' interests, since an executive will strive to help improve the company in order to make his or her options more valuable. Backdating, on the other hand, is simply a technique to enrich the option-holder. Instead of pricing the option when it is issued, executives and companies are charged with going back and changing the date of the grant to a time when the stock price was even lower. If the company had actually granted the option on that date, it would have created a compensation expense for itself. But if the company backdates an option, the expense was never recorded, which is why we're seeing so many companies having to go back and restate their financials.
Cablevision's use of backdated options as incentives for a dead man, however, brings the issue to a new low, and makes you wonder about the maneuver's true motivation. Lustgarten was said to be a close confidante of Cablevision's ruling Dolan family, and all of the executive's options would have been eligible for exercise by his estate upon his death.
"Vote early, vote often" once seemed to be a rallying cry of crooked politicians everywhere. Perhaps granting stock options to everyone, anytime, living or dead, has become the new mantra of corporate excess.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
