SEC filings show new chairman got options 3 years before joining board
Updated 11/21/2006 3:23 AM ET E-mail | Save | Print | Reprints & Permissions | Subscribe to stories like this
By Elliot Blair Smith, USA TODAY
Former U.S. congressman Tony Coelho received below-market stock options from Cyberonics (CYBX) in early 1994, three years before he joined the board, at a much deeper discount to the market price than the company's stock-option plan provided for at the time, according to Securities and Exchange Commission filings.
On Monday, Coelho was named chairman of the medical device maker after its former chairman and CEO, Robert Cummins, resigned under pressure. Coelho did not respond to requests for comment through the company, his lawyer or the Epilepsy Foundation, which he chairs.
Coelho's first options at Cyberonics, dated April 14, 1994, entitled him to buy 20,000 shares of company stock at a 32% discount to the stock's market price on the grant date, according to a Form 3 stock ownership record he filed later with the SEC.
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Cyberonics' maximum discount on options it issued at the time was 15%, according to the company's stock-option plan filed separately with the SEC that October.
In Cyberonics' 1994 shareholder proxy filing, which contained a copy of the plan, company officials stated that all options under the plan had been issued at the stock's fair market value.
Another member of the board's compensation committee, neurologist Stanley Appel, also received below-market stock options in 1994, two years and three months before he joined the board. Appel got 50,000 options on Sept. 21, 1994, priced at $3.06, a 35% discount to the stock's market price that day.
Since mid-1997, Coelho and Appel have served on the board's compensation committee, forming a two-member panel during many of those years. The two directors administered Cyberonics' stock-option plan and helped set CEO compensation.
Coelho, the former Democratic party whip in the House, resigned from Congress in June 1989 after failing to disclose on his congressional financial statement a "junk" bond investment he had obtained on favorable terms. In recent years, Coelho and Appel cashed out their below-market options from Cyberonics at different times, reaping nearly $1.1 million in combined profits, SEC filings show.
Appel had no comment. At the time Coelho and Appel received their below-market options, the head of the compensation committee was Cummins, who took the helm of the company in October 1995. Cummins also declined to comment.
Cyberonics is now under investigation by the SEC and the U.S. Attorney's office in Manhattan, which are looking into the company's history of awarding lucrative stock options to company officers and directors. Until Monday, the company denied any wrongdoing. It now says it has identified some irregularities, principally from 1999 to 2003.
According to Financial Accounting Standards Board rule APB 25, issued in 1993, Cyberonics should have recorded the 1994 below-market options as an expense for tax and accounting purposes.
In addition, the two men would have been required to report as personal income that year the difference between the Cyberonics options' price and the stock's market price.
"It is taxable income in the year in which the option is received. And the income is the difference between the strike price" — that is, the price at which the option is issued — "and the fair market value," says tax lawyer Kenneth Rubinstein.
For Coelho, the taxable benefit would have been $50,000 on the grant date. For Appel, the benefit would have been $84,375 on the grant date.
Former longtime Cyberonics director Thomas Duerden, 76, whom company documents show served on the compensation committee in 1994 when Coelho and Appel were awarded the below-market options, said in an interview, "I don't recall ever being a member of the compensation committee." But he calls the below-market options to Appel and Coelho "very improbable."
Duerden also is unable to say what Coelho and Appel did to earn their options. "I didn't know Stan Appel from a bar of soap until he joined the board" in 1996, Duerden says.
And, he says, "It's my memory that the first time I ever set eyes on Tony Coelho was when he joined the board" in 1997.
Appel first reported his below-market options to the SEC in December 1996, 27 months after the grant date. Appel cashed out half of this below-market grant on June 21, 2004, for a $639,249 profit. He also held onto 20,000 shares with a market value of $680,400 on that date.
Coelho first disclosed his April 1994 options grant in March 1997 upon joining the company's board. Unlike most stock options that mature over four to five years, Coelho's filing shows that these options could be cashed in immediately.
In June 2002, Coelho made another disclosure in a Form 5 stock ownership record filed with the SEC. In that filing, Coelho reported having received 20,000 options on March 8, 1994 — coinciding with the lowest price the stock traded at that month — rather than on April 14, 1994, but at the same price.
A key difference in the 2002 filing was that Coelho reported those options as vesting over five years rather than right away. He made a $444,420 profit when he cashed out the options in November 2003.
"Why did (Coelho) get an option grant three years before he joined the board? Why has the date moved? Why is the stock priced low? And (why), when they first reported them, (did) they (say) they were immediately vestable, and then later, they said, no, they vest over five years? Which one was it?" asks former SEC attorney Ronald Mueller, who specializes in executive compensation and disclosure issues.
Former SEC chairman Harvey Pitt says, "One of" Coelho's filings "has to be wrong.
"Both of them," Pitt says, "could be wrong."
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