September 19, 2004
Viacom's Redstone dumps stock during RathergateBy Thomas Lifson
Unless someone has hacked the Security and Exchange Commission's website, it would appear that Viacom's Chairman and CEO Sumner Redstone chose to sell almost $12 million worth of stock in the midst of the Rathergate scandal roiling its wholly—owned subsidiary, CBS. A copy of the SEC's Form 4 'Statement of Changes in Beneficial Ownership' posted on their website indicates that the billionaire exercised 341,500 options, and sold the stock on the same day, September 14, 2004.
As the worlds of journalism and politics buzzed with speculation over the depth of trouble CBS and Viacom faced, the boss of bosses sold stock.
When insiders sell stock during a corporate crisis, it always raises eyebrows. If the insiders are acting on knowledge unavailable to the public, they could face severe penalties, as Martha Stewart has so recently discovered.
One legitimate excuse for the sale would be if Redstone's options were expiring on that day. He could then readily maintain that he was not reacting to inside information. But his options don't expire until 2007. He is still holding options for another 658,500 shares, expiring the same day, August 1, 2007.
Of course, Redstone still holds indirectly, via a company he controls, and via stock options, about 105 million other shares in Viacom. So he has not liquidated more than a tiny fraction of his total holding in Viacom.
It is frankly mind—boggling to contemplate that Redstone would take such a step. There must be some compelling reason for him to have exercised the options and sold the shares, a reason which would immediately cause the SEC to accept it as valid. But we don't know what it is.
Absent such a compelling reason, the SEC is known to look very, very closely at insider sales of stock during a time of corporate crisis. A man of Redstone's wealth does not need to bring such trouble down on his head. But neither did Martha Stewart, of course.
At the end of trading Friday, Viacom stock closed at $34.73. By selling at $35, Redstone made an extra $92,205 on his shares, compared to what they were worth at the end of the week. His profit on the deal totaled $6,744,625 before brokerage fees.
Redstone, incidentally, is a generous political contributor , often to Democrats of a left—leaning inclination. For example:
VIACOM INC DASCHLE, THOMAS ANDREW (D)
A hat tip to the Precise Truth blog for catching this SEC filing, and to Clarice Feldman for sending it to me.
UPDATE: My friend Steve Bainbridge, one of the country's premier authorities on securities law, has addressed the issue of insider trading as it might relate to Viacom management. To my puny layman's brain, the phrase which leaps out at me is "knowing possession of material nonpublic information." Redstone could well argue that he was not in posession of any particular knowledge of the situation within a division of a subsidiary of Viacom. He might well argue that the revenues of CBS New programs are not material to a company as big as Viacom.
But if I were a Viacom shareholder, I would not be comforted. The company holds one or more TV licenses in 15 of the top 20 markets, and over 185 radio station licenses, many in major markets. In June, 1980, the FCC refused to renew the license for Boston television station WNAC, owned by RKO General Corporation, because
RKO is a wholly—owned subsidiary of General Tire & Rubber Company and
General Tire, and its sister subsidiaries, RKO participated in a reciprocal trade practices[**5] scheme which began as early as 1961 and which was not officially terminated until after commencement of the term for which license renewal is sought. The purpose and effect of this scheme was to obtain customers for the General Tire family (including RKO) not on the basis of quality, service, and price but on the basis of the General Tire conglomerate's large scale buying power. This reciprocity scheme was anticompetitive, probably violative of the antitrust laws,[emphasis added] and (in the case of RKO) corruptive of the normal free market process by which the demand for advertising time helps ensure that radio and television programming is responsive to public desires.
Without even needing a criminal conviction of the parent company, the FCC has raised a high standard of corporate good behavior.
Given that concerns have been raised about the applicability of forgery laws, and reports that CBS knowingly disregarded warnings from document authentication experts in going ahead with a report potentially able to change the results of a presidential election, Viacom needs to exercise careful supervision in this sensitive area, since it has billions dollars of broadcasting assets potentially at risk, should the FCC examine its behavior critically. The value of those broadcasting licenses is material to Viacom.
UPDATE 2 Readers have written in some interesting suggestions. One notes that Sumner Redstone may have planned this exercise and sale some time ago, and may have notified the SEC beforehand. If so, he would certainly be in the clear. Another, Jack Risko, says,
"I would add that Dan Rather's ratings plunge was not reported publicly until two days after Redstone sold his stock (by Drudge), and that the level of dissatisfaction at the affiliates was not a matter of public knowledge, in addition to everything else."
I would note that I have been observing Sumner Redstone's career since the 1970s, well before he became so nationally prominent. His highly profitable operation of a theatre chain came to my attention while we both living in Boston. I can say without hesitation that he is as shrewd, tough, and intelligent as they come. I would be inclined to believe not only an innocent explanation for his actions, but also that he would be able to document it. He has never had a reputation for blunders.
UPDATE 3 Jack Risko further writes:
"The normal process in a large public corporation for the selling of shares by executives is that there is a window for doing so every quarter. Normally, the General Counsel's office would have been notified and would have signed off well in advance of the proposed sale, which might be taking place for any number of reasons, like paying quarterly taxes or a particularly large capital expenditure. In the case of Viacom, if we assume the normal steps were taken, a question becomes: when was company counsel brought into the loop of the seriousness of the matters at stake in the Rathergate forged memos?
UPDATE 4: According to the New York Times:
According to company documents, he filed for the right to acquire up to a million of his options and sold 341,500 shares last week for a profit of $6.8 million. The sale, officials said, was for estate tax purposes and was not related to the troubles at CBS News.
If Redstone filed before the crisis began, he is in the clear.