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Report: Adelphia Failed to Disclose Option Grants

Adelphia Communications Corp. failed to disclose option grants for 250,000 shares of stock it issued to a former member of its board of directors and threatened its former chief financial officer when he tried to shed light on the transaction, an article in TheWall Street Journal said Monday.

According to the report, Adelphia issued option grants for 250,000 shares of stock to former board member Leslie Gelber in 1999, related to consulting services Gelber performed for the MSO prior to becoming a board member. However, the MSO never disclosed those options in its financial filings.

Although Gelber never exercised those options -- the strike price was $60 per share, well above Adelphia’s current stock price of $1.33 each in afternoon trading Monday -- public companies are required to disclose all exercisable and unexercisable grants issued to executives and board members.

What is perhaps more troubling is that at the time the grants were suppressed, Gelber was leading the board’s internal investigation into alleged wrongdoing at the company.

Gelber resigned from Adelphia’s board of directors in July.

The Journal said that after the Adelphia accounting scandal broke in 2002 and its founding Rigas family resigned, new CFO Christopher Dunstan -- who joined the MSO in May of that year -- discovered the option grants and made moves to disclose them. However, according to the Journal article, when Dunstan tried to disclose the information, Adelphia’s lawyers -- Willkie, Farr & Gallagher LLP -- threatened him with a sexual-harassment suit, centering around a voice-mail message Dunstan supposedly left a female Willkie associate and photos of a Caribbean vacation he allegedly showed that employee and others that included a picture of a topless sunbather.

A separate investigation by an independent law firm found that the sexual-harassment charges had no merit.

Dunstan resigned in March 2003 after new chairman and CEO William Schleyer came on board. However, according to the Journal article citing people familiar with the situation, Schleyer insisted that Dunstan’s $700,000 severance package be tied to his not disclosing the option grant.

In his March resignation letter, Dunstan called for the investigation of certain transactions between Adelphia and an undisclosed board member.

According to an 8-K financial filing with the Securities and Exchange Commission March 21, Adelphia said it had conducted an investigation into Dunstan’s accusations between February and March of that year and it "expects to conclude that the actions by the director in question do not rise to a level of materiality or importance to the company’s security holders so as to require disclosure at this time."

Adelphia spokesman Paul Jacobson denied in the Journal piece that Adelphia had done anything wrong and denied that Schleyer tied Dunstan’s severance package to the former CFO’s silence on the option matter.

"The company made no attempts to suppress information it was obliged to disclose," Jacobson told the Journal. "Bill Schleyer did not tie severance benefits to the nondisclosure of the Gelber options."