On May 6th, Diamond Foods announced they hired Brian Driscoll, the former CEO of Hostess Brands, as their new CEO. In the 8-K announcing the hire, Diamond disclosed that Driscoll would receive both $1.5 million worth of restricted stock units and options on the “Grant Date.” The “Grant Date” just happens to be three business days after the financial restatements are released.
http://sec.gov/Archives/edgar/data/1320947/000119312512215196/d347849d8k.htm
“To grant Mr. Driscoll a nonqualified stock option and a restricted stock award on the third business day after the date on which Diamond files with the SEC its restated financial statements for fiscal 2010 and fiscal 2011 (“Grant Date”)”
The question for the house is, why was this negotiated into the agreement? Why not just set the options and restricted stock units at the date of hire?
For example, when Diamond hired two new board members on March 7th, Diamond did not leave open the grant date. They just used the closing price of the stock at the date of the announcement.
http://sec.gov/Archives/edgar/data/1320947/000119312512103787/d312424d8k.htm
“In addition, each New Director automatically received awards of restricted stock and a stock option under the Company’s 2005 Equity Incentive Plan. The New Directors received a grant of 4,977 shares of restricted stock, which is equal to $120,000 divided by $24.11, the closing price of the Company’s common stock on March 7, 2012.”
“The New Directors also were granted an option to purchase 10,000 shares of the Company’s common stock at an exercise price of $24.11 per share, which was the closing price of the Company’s common stock on March 7, 2012.”
If you are a Diamond bull you would argue, that the Diamond Board is now responsible corporate citizens. They are looking out for the interest of its shareholders. The stock is going to fly upwards after the restatement. Lets make the CEO actually work for his money, rather then giving him free money with options and restricted stock at such a low strike price at the date of hire.
You would also argue that the Key Executive Retention Plan given on Feb. 24th for the four top executives, who are clearly exemplary employees and had no knowledge of the fraud, was a different situation. Diamond needed to keep these employees. They could not wait till after the smoke clears to grant them new bonuses. Their new restricted stock units had to be calculated just two weeks after the audit committee announcement on Feb 8th, otherwise these great employees might have left the company. The new CEO Brian Driscoll did not have the type of leverage over the Board as these key employees.
http://sec.gov/Archives/edgar/data/1320947/000119312512078071/d306582d8k.htm
If you are bear, like me, you say nice job Driscoll on the negotiating tactic. You just quit on one bankrupt company after they balked on your executive compensation. (http://online.wsj.com/article/SB10001424052970204781804577271502269079914.html). Now you were able to get hired at another company that also needs to be restructured, but this time the Board gave you $1.5 million restricted stock and $1.5 million worth of options without a fuss. Unlike those pesky guys at the Hostess employee union and the federal bankruptcy watchdog, who complained about your pay.
And not only that, the Board was so desperate for a new CEO, they were willing to frontdate your options and restricted stock. Why would you want your options and restricted stock at the current price. You do not want to touch this thing even at the current price with other peoples money. You are going to get your free look at this stock after it collapses.
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Diamond is one of the mostly heavily shorted stocks. If the restatement causes the stock to go higher, then there would likely be an epic short squeeze - remember the stock went from $26 to $40 in December because the great Akshay Jagdale at Keybanc comment that everything was fine at Diamond. It would be kinda of funny, if Driscoll got his restricted stock and options at a price that is irrationally high because of a major short squeeze.
