A Republican Senator’s Corporate Misdeeds

This article is reprinted from the American Prospect.

On October 20, 2000 -- just 18 days before former Virginia Governor George Allen was elected to the U.S. Senate -- Xybernaut, a Virginia-based technology company, on whose board Allen served, held an early annual shareholder meeting and awarded Allen a tidy bonus of 50,000 stock options. Allen was granted the stock as part of his re-election to the board at a time when polls showed him to be the favorite in the impending senate election against Democrat Chuck Robb, and when it was clear that he would have to resign his board seat if and when he became a senator. Senate rules forbid members from serving on corporate boards.

The issuance of these options, whose existence is confirmed by the Form Five filing with the Securities and Exchange Commission, raises questions about why Xybernaut (which filed for bankruptcy in 2005) granted them to Allen so soon before his election to the Senate, and what, if anything, the company expected in return for them. Stock options, a controversial form of director compensation, "are designed to encourage future risk taking and align the interest of the director with the interests of the shareholder," says attorney Beth Young, a corporate governance expert now lecturing at Harvard Law School. Re-electing a director who might have to resign within weeks "is a little unusual," she says, and granting him additional options prior to his anticipated departure at an early annual meeting is "very unusual."

Allen's campaign has struggled to explain his financial relationship with Xybernaut. An attorney for Allen told reporters as recently as this October that all of the senator's stock options expired within 90 days of his resignation from the Xybernaut board in December 2000. However, in 2001 and subsequent years, Allen filed disclosure reports with the secretary of the Senate stating that he continued to hold potentially valuable Xybernaut stock options. (Here are the relevant pages from his June 2001 filing; here are his complete filings covering 2002 and 2003.) While Allen's campaign has given reporters conflicting explanations, it has confirmed an early October Associated Press report that Allen wrote a letter to the Army in December 2001 on Xybernaut's behalf -- a period in which Allen reported that he held Xybernaut stock options.

Allen is currently locked in a tight re-election contest with Democrat James Lee Webb. His substantial lead over Webb has eroded in recent months, due in part to Allen's controversial racial remarks, as well as questions raised by his financial dealings with Xybernaut, a long-beleaguered hi-tech firm that marketed wearable computers.

The October 20, 2000, shareholder meeting stands out for its unusual timing close to the election, and also for its deviation from past company practice. The company had held its 1999 shareholder meeting in late December. Beginning in 2001, it held its shareholder meetings in June. But in September 2000, the company sent a proxy filing to shareholders announcing the October meeting. The filing stated that its policy was to reward directors with 50,000 stock options upon their initial election to the board, and then with 10,000 additional options annually. Xybernaut's compensation rules as outlined to the shareholders did not grant directors additional options upon their re-election to the board. And yet Allen received 50,000 additional options on the same day as that annual meeting, according to his Form Five filing. The new options awards proved to be a short-lived phenomenon, however: Xybernaut board members re-elected in 2001 did not receive the re-election bonus given to Allen.

The company's failure to tell shareholders that rule changes would benefit Allen, at the same time that it was soliciting votes for Allen for his re-election to the board, could raise serious legal questions, since shareholders were not told that Allen's re-election would trigger the issuance of more options. Moreover, though corporations are required to report stock options awarded to directors in their Security and Exchange Commission filings, Xybernaut managed to avoid disclosing the pre-election 2000 award of the 50,000 shares to Allen in its 2001 filings, since Allen had by then resigned. Xybernaut did not respond to the Prospect's queries.