Tuesday, November 28, 2006

Compensation Consultant Named as Options Backdating Lawsuit Defendant

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Shareholders suing Cablevision Systems over its backdated options have amended their complaint to add the company’s former compensation consultant as a defendant. According to news reports (here), the allegations against Lyons Benenson & Co., the company’s former compensation consultant, are the first in the nation to accuse a compensation advisor of taking part in a backdating scheme.

Cablevision’s options granting practices gained a certain macbre notoriety for their involvement of the first known instance of “Sixth Sense” options grants (“I pay dead people” – hat tip to Patrick McGurn at the ISS Corporate Governance Blog, here, for that great one-liner). In its 2Q06 10-K (here), Cablevision reported that its internal options investigation uncovered that the company had awarded options to a vice chairman after his 1999 death, but backdated them, making it appear that the grant was awarded when he was still alive. As Columbia Law School professor John Coffee dryly commented (here), “Trying to incentivize a corpse suggests they were not complying with the spirit of shareholder-approved stock-option plans.”

Cablevision’s filing also disclosed that its internal investigation had discovered that options had also been awarded to its compensation consultant, but that the options award had been accounted for as if the consultant were an employee. The filing reported that the award had been canceled in 2003. The filing also noted that the company’s “relationship with the company…terminated” more than a year before the options investigation began.

The company also restated its earnings for 2003 through 2005 and the first quarter of 2006 to adjust for the impact of improper options practices, which reportedly took place during the period 1997 through 2002. The company has announced that it is under investigation by the SEC as well as the U.S. Attorney’s office. The company has also received a grant jury subpoena.

The shareholder action naming Lyons Benenson as a defendant was filed by Grant & Eisenhofer on behalf of plaintiff shareholder the Teachers Retirement System of Louisiana. The complaint alleges that Lyons Benenson attended compensation meetings during which backdated options were granted in violation of the company’s employee option plan. The complaint also alleges that the consultant provided the committee with advice and documentation to facilitate the grants. The complaint also contains allegations about the options awareded to the consultant; the complaint does not allege that the options were illegal or backdated, but that they were “unusual and inappropriate” given that they came from an option account designated for Cablevision employees.

Cablevision has also been in the news lately based upon the offer by the Dolan family, which controls the company, to buy out the company’s public shareholders in a deal that values the company at about $7.9 billion. The D & O Diary previously commented on the buy out offer here. As noted in the Wall Street Journal article (here, subscription required) reporting on the Dolan’s buy out offer, the company’s recent history has been “turbulent,” as detailed further in the article.

While the Cablevision shareholders’ claim against Lyons Benenson may be the first against a company’s compensation consultant arising out of the backdating scandal, there may be many more claims against the outside advisers to companies caught up in the backdating scandal. Attorneys, auditors and others undoubtedly will also be drawn in as the story continues to unfold. (See more details below about options backdating litigation.)

What Can EDGAR Tell Us About Lyons Benenson?: The D & O Diary had not previously heard of Cablevision’s erstwhile compensation consultant, so this seemed like a good opportunity to test out the new full-text search capabilities of EDGAR, on the SEC website. (See the SEC’s November 14, 2006 press release about the new full-text search capabilities, here.) A full-text EDGAR search on the name Lyons Benenson revealed several instances associating the firm or one of its principals with various public companies. (It should be noted that the searchable text is limited only to the last four years.)

The 2002 10-K of ACTV, Inc. (here) revealed that the company had hired Lyons Benenson as a compensation consultant in 1999.

The December 22, 2003 proxy statement of DRS Technologies (here) disclosed that the company previously had retained Lyons Benenson to "assist in the design, assessment, and implementation" of the company's compensation system, but at the end of the most recent fiscal year had replaced the consultant with another firm.

The April 7, 2006 Proxy Statement of CKX, Inc. (here) disclosed that the company had retained Lyons Benenson as a compensation consultant "to assist the Committee in fulfilling its responsibilities and to provide advice with respect to all matters relating to executive compensation and the compensation practices of similar companies. The consultant is engaged by, and reports directly to, the Compensation Committee. Harvey Benenson generally attends all meetings of the Compensation Committee on behalf of Lyons, Benenson & Company Inc."


In addition, according to 2005 10-K of Penn Octane (here), Harvey L. Benenson, who is described in the filing as a "Managing Director, Chariman and Chief Executive Officer" of Lyons Benenson, served as a director of the company since his election in August 2000. Benenson also served on the company's audit and compensation committees. However, according to news reports (here), Benenson resigned from the Penn Octane board in October 2006.


Options Backdating Litigation Update: As a result of the latest additions to The D & O Diary’s running tally of options backdating litigation (which may be found here), the total number of companies named as nominal defendants in options backdating related shareholder’s derivative lawsuits now total 117. The number of companies sued in options backdating related securities fraud lawsuits stands at 21.


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OK, But They Don't Get Any Stock Options Awards: From the IMdb website (here), which touts itself as the "Earth's Biggest Movie Database":

Cole Sear: I see dead people.

Malcolm Crowe: In your dreams? [Cole shakes his head no]

Malcolm Crowe: While you're awake? [Cole nods]

Malcolm Crowe: Dead people like, in graves? In coffins?

Cole Sear: Walking around like regular people. They don't see each other. They only see what they want to see. They don't know they're dead.

Malcolm Crowe: How often do you see them?

Cole Sear: All the time. They're everywhere.


Cole's perception is familiar to those (including your faithful correspondent) who have worked in certain office environments.

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