Grand Casinos Eases Its CEO's Pain with Options Windfall

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By Alex Berenson
Staff Reporter

The option greedheads are getting bolder and bolder.

The latest corporation to give up accountability to offer its executives a quick buck:

Grand Casinos

(GND)

.

In the early 1990s, investors lionized Grand and its chairman and CEO, Lyle Berman, as Minnesota-based Grand opened casinos in Minnesota, Mississippi and Louisiana. Between its initial public offering in October 1991 and its peak in June 1993, Grand stock was hotter than a Las Vegas summer, rising almost seven-fold.

Recently, though, Grand has had much more trouble making money for itself -- or its shareholders. But Berman doesn't seem to have noticed, and his not-very-independent board apparently hasn't either.

In May 1996, when Grand's stock traded at 32, the company's board gave Berman 1 million options. That mammoth grant, amounting to more than 2% of Grand's total shares outstanding, came although Grand stock was still below its 1993 highs.

But Grand stock didn't stay at 32 for long. In the 10 months since Berman got his options, Grand has cratered, thanks to subpar results at its Mississippi casinos and a $135 million writeoff of Grand's investment in the bankrupt

Stratosphere

casino in Las Vegas. (

The Street

reported on Grand's dismal earnings in February.)

The stock now stands at about 10, a 70% drop from its highs last spring. The plunge has cost shareholders more than $1 billion in equity.

But weep not for Berman or Grand's other executives. On Feb. 27, Grand's board lowered the price of Berman's options from 32 to 11.

Of course, that means that if the stock moves above 11, Berman makes money. And if he can just get the company's share price back to 32, the price at which the options were initially granted, he'll make more than $20 million.

And Berman wasn't the only Grand exec to benefit from the board's largesse. President Thomas Brosig saw options on 300,000 shares repriced from 17 5/8 to 11, while Executive Vice President Stanley Taube had 60,000 options repriced from 32 1/8 to 11.

Grand disclosed the repricing in a footnote in its proxy statement, released earlier this month. The company didn't offer an explanation for its action in the proxy. Berman was traveling and could not be reached for comment.

But Grand spokeswoman Jaye Snyder says Grand lowered the options' strike price because "the company's stock had been devalued so significantly." At the higher price, the options were not "an incentive for

the executives -- it wasn't compensation for them, because they had no opportunity to make money," Snyder says.

Of course, the 4 million Grand shares Berman already owns would seem incentive enough to keep the company's stock price up. But Snyder notes that Berman oversees or controls several other companies. Berman is CEO of publicly traded

Rainforest CafT

(RAIN)

, whose stock has also tumbled recently.

"A senior executive like Lyle Berman has many things he can do with his time," Snyder says. "Our board of directors chose to incentivize him so he could spend his time with Grand Casinos. ¿ He has other uses of his time."

And what do the outside directors think? Of Grand's five outside directors, two are top executives at

Wilsons The Leather Experts

, a troubled leather-goods retailer, also based in Minnesota, owned by Berman. A third is a director of Wilsons, according to Grand's proxy.

The proxy also notes that Grand's fourth outside director is the chairman of

Ladenburg Thalmann

, a New York firm that "has periodically provided investment banking services to the company." And the fifth director is a lawyer at a Minneapolis law firm that Grand paid more than $500,000 in its 1996-97 fiscal year.

Two of the outside directors referred questions about Berman's pay to Grand. The others didn't return calls for comment. Berman was traveling and could not be reached for comment.