The unusual saga of Cablevision Systems’ stock-options scandal took an even more bizarre twist when the company revealed that it had back-dated options for a dead man.
According to its 10-Q quarterly report filed Sept. 21, Cablevision revealed that after a lengthy investigation by an independent auditor, it discovered discrepancies in the dating of options grants for two former employees -- one a consultant whose contract was terminated in 2003 and the other an executive officer “whose death occurred after the stated grant date of the award and before the actual grant date.”
It was later revealed in an article by The Wall Street Journal that the deceased employee was late vice chairman Marc Lustgarten, a longtime Cablevision executive and confidante of the company’s ruling Dolan family, who died at the age of 52 in 1999 after a long battle with pancreatic cancer.
While it could not be determined how much the Lustgarten estate may have benefited from the back-dating, SEC documents revealed that the estate had options for about 400,000 shares, at least until 2003.
A former lawyer and high-school English teacher before joining Cablevision in 1975, Lustgarten was instrumental in landing several deals for the Bethpage, N.Y.-based operator, including the one that brought the company Madison Square Garden. Lustgarten was chairman of MSG before his death, and he was known for being able to interpret and put into action chairman Charles Dolan’s sometimes-murky vision.
He had also taken current Cablevision CEO James Dolan under his wing. At Lustgarten’s 1999 memorial service in New York, James Dolan fought back tears in eulogizing the former executive.
“Somehow, my dad and I will have to figure out how to relate to each other, and without Marc, that won’t be easy,” James Dolan said at the memorial service, according to published reports.
Lustgarten left behind a wife and two children, so the motivation for the back-dated options could have been primarily to ensure that the family was taken care of. However, Columbia University Law School professor John Coffee said there may have been other motivations behind Cablevision’s methods.
“It may have been intended as a death benefit to give something to the family as a condolence, or it may have been intended to hide the option and the fact that it was back-dated,” Coffee said. “Whatever the reason is, it is not a permissible use of shareholder-approved stock options.”
Coffee said one motivation for issuing an option rather than a death benefit is that death benefits are an expense, which would result in a reduction to earnings. Stock options do not require such a reduction.
“The only time you can avoid taking a deduction is if it’s a true, qualified stock option,” he added. “If you’re giving a death benefit to the family because you like the man, then that’s a deductible expense, which is what managements don’t like because deductions reduce income.”
Cablevision spokeswoman Kim Kerns declined to comment.
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