Apple Stock Irregularities Probe Completed, Fallout Begins

[MacRumors]

http://www.macrumors.com/images/macrumorsthreadlogo.gif (http://www.macrumors.com)

In a press release (http://www.apple.com/pr/library/2006/oct/04investigation.html) issued today, Apple announced that its independent investigation into stock option grant irregularities has been completed. The investigation's key findings are as follows:
-The investigation found no misconduct by any member of Apple's current management team.

-The most recent evidence of irregularities relates to a January 2002 grant.

-Stock option grants made on 15 dates between 1997 and 2002 appear to have grant dates that precede the approval of those grants.

-In a few instances, Apple CEO Steve Jobs was aware that favorable grant dates had been selected, but he did not receive or otherwise benefit from these grants and was unaware of the accounting implications.

-The investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants. The company will provide all details regarding their actions to the SEC.

Steve Jobs had the following statement regarding the probe's findings:
"I apologize to Apple's shareholders and employees for these problems, which happened on my watch. They are completely out of character for Apple" said Steve Jobs, Apple's CEO. "We will now work to resolve the remaining issues as quickly as possible and to put the proper remedial measures in place to ensure that this never happens again."

With the investigation's end, former Apple CFO Fred Anderson (CFO 1996-2004) announced his resignation from Apple's board of directors, beginning the investigation's fallout. Earlier this year, Apple missed the deadline for reporting their 3Q filing with the US Securities and Exchange Commission due to the accounting errors related to the "irregularities", which prompted Nasdaq to warn Apple of possible delistment (http://www.macrumors.com/pages/2006/08/20060814111519.shtml) from the exchange if the situation was not promptly rectified. Apple will most likely have to re-state historical financial statements.

Dozens of corporations, including Microsoft, Intuit, and Computer Associates, have announced that they are reviewing their option practices, which have come under increased scrutiny since enactment of the Sarbanes-Oxley corporate accountability law (http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act) in 2002.

Digg This (http://www.digg.com/apple/Apple_Stock_Option_Irregularities_Probe_Completed_Fallout_Begins) (the story of course, not the fact that Apple had stock option irregularities) ;)

[hyperpasta]

Stock's barely down. <Breathes sigh of relief>

[avensis087]

should be relatively good news...hopefully when they restate eveything, the stock will hold up.

-mr

[bdj21ya]

Stock is down 58 cents (that's 58 cents less per share than when the market closed this afternoon) in off-hour trading. Not bad, but I'm surprised it's not up after this announcement. It seems as though they are saying that things won't be too bad. Of course, there is nothing here that gives any idea what the restatement amounts will be.

[longofest]

Stock is down 58 cents (that's 58 cents less per share than when the market closed this afternoon) in off-hour trading. Not bad, but I'm surprised it's not up after this announcement. It seems as though they are saying that things won't be too bad. Of course, there is nothing here that gives any idea what the restatement amounts will be.

Not that I'm a market EXPERT by any means, but what's past is past, especially when it is multiple years ago. I would expect the market to pay more attention to the fact that Apple just lost a board member. Also, remember that they haven't yet filed their 3Q SEC 10q, which if they don't get done quickly, could bump them off NASDAQ (that would be HUGE, but improbable).

[NewSc2]

doesn't seem too bad.

[bdj21ya]

Not that I'm a market EXPERT by any means, but what's past is past, especially when it is multiple years ago. I would expect the market to pay more attention to the fact that Apple just lost a board member. Also, remember that they haven't yet filed their 3Q SEC 10q, which if they don't get done quickly, could bump them off NASDAQ (that would be HUGE, but improbable).

I agree that you're probably right. Losing the CFO is a bigger deal. You're also right that being delisted is quite unlikely. Several companies are still there after missing a few 10-Q's and even the more important annual 10-K form. I'm sure Apple will file their 10-Q as soon as the internal investigation can produce some final numbers for historical financial statements (necessary to get the right numbers on the 10-Q). I wouldn't be surprised however if this final report took place sometime around another positive announcement--just to minimize the blow. It will make it a lot harder for investors to decide that jumping ship is the right action for the time.

[skoker]

Well I am glad that at least it's over now.

[hyperpasta]

Losing the CFO is a bigger deal.

Apple didn't lose its CFO. It lost a board member, who happened to be a PREVIOUS CFO. They also claimed one other person was responsible, but we don't know who that is yet.

[bdj21ya]

Apple didn't lose its CFO. It lost a board member, who happened to be a PREVIOUS CFO. They also claimed one other person was responsible, but we don't know who that is yet.

good point, bad skimming on my part.

[skunk]

They also just gained a board member, so they're even. :)

[bdj21ya]

Well I am glad that at least it's over now.

Umm, I don't think it's anywhere near over. It's like they want to announce things in stages to lessen the blow. I think that getting the numbers and finding out who else was responsible is what shareholders are interested in now.

[rdrr]

Well I am glad that at least it's over now.

No it is not... This is from an independent investigation. The SEC still can find Apple at fault and fine them. Then there is always the possibility of some of the stock holders getting together and suing Apple.

[WildCowboy]

Then there is always the possibility of some of the stock holders getting together and suing Apple.

They already did that months ago...

[skoker]

I meant the independent investigation is over finally... :rolleyes:

[IJ Reilly]

They also just gained a board member, so they're even. :)

I think they call that a "wash." Or if you're really lucky, a "wash and wax."

[SeaFox]

Yup, looks like all that hand wringing over a SEC investigation was rather overzealous. Not much ot see here.

Wonder how Dell's investigation will come out?

[Doctor Q]

Even though the press release is about both the investigation and about Fred Anderson, it doesn't explicitly say that this is why he's left the board.

It looks like Steve Jobs was "responsible" but not "to blame".

[IJ Reilly]

It looks like Steve Jobs was "responsible" but not "to blame".

I suppose it beats being to blame but not responsible.

[twoodcc]

well it could have been worse i guess. I hope the stock doesn't get hit in the near future though

[mdntcallr]

Well, i know it seems weird. but hell Apple seems to be in the bad zone on this.

they better come clean and fix the accounting. shareholders are the only ones who should worry though, as the accountants and lawyers are the only ones spending too much time on this one.

one question though, now that apple found the problems... HOW BAD IS IT????

that is the question everyone will want to know the answer to. hell if it isnt alot of shares, they can deal. but if it is hundreds of millions of dollar worth.... shame on them

[tkidBOSTON]

Honestly, as an accountant, I've noticed the Street often doesnt respond at all (either negatively nor favorably) to restatements usually. Often times its the hype around large public companies that makes the stock respond. I've had a large client make some rather large restatement and the street didnt look twice. They were too busy bumping the stock up based on some new product in the pipeline. If I were holding apple shares I wouldnt get too concerned until this makes the front page of CNN or a top story on your local news.

My $0.02.

[Play Ultimate]

Apple is not the only one that is running into these problems. Dell and Microsoft are on the hook as well. Apple, being the darling company, is just today's poster child.

For some reason, I believe that Dell and MS will have more problems getting this fixed than Apple will. And will take alot more flak considering their current stock price.

[The Tuck]

Steve Jobs is such a great guy. He seems like he's really giving his all to run this company and keep it operating smoothly.

Long live the Leader!

[BenRoethig]

Even though the press release is about both the investigation and about Fred Anderson, it doesn't explicitly say that this is why he's left the board.

It looks like Steve Jobs was "responsible" but not "to blame".

Someone had to take the fall and it was either Steve Jobs or Fred Anderson.

[Analog Kid]

If I'm reading this right, the problem is that Apple options were priced on the wrong date-- wrong in the sense of, uh, illegalish. Not sure how many shares we're talking about here, but restating this would just be a matter of the number of shares granted times the difference in price between the dates plus whatever penalties get attached, right?

None of the current officers are going to jail or being shamed into retiring, so the management team stays intact. Doesn't seem that big to me. Anyone know what the estimates are for the restatement?

I suppose it beats being to blame but not responsible.
Ugh. I know that feeling... "Look, Honey, I had nothing to do with it!" No matter...

[longofest]

I wouldn't be surprised however if this final report took place sometime around another positive announcement--just to minimize the blow.

Part of me is wondering whether today's announcement was timed with the hubbub on Capital Hill. I know a lot of the news was paying attention to the Foley scandal, and if it was a lighter news day this may have made news.

Probably pure coincidence, but interesting none the less.

[iMikeT]

I can't believe it!

Microsoft first copies Apple's ideas regarding technology, now they copy Apple's business decisions?

When will Microsoft finally cease copying everyone else?:rolleyes:

[rdrr]

If I'm reading this right, the problem is that Apple options were priced on the wrong date-- wrong in the sense of, uh, illegalish. Not sure how many shares we're talking about here, but restating this would just be a matter of the number of shares granted times the difference in price between the dates plus whatever penalties get attached, right?

None of the current officers are going to jail or being shamed into retiring, so the management team stays intact. Doesn't seem that big to me. Anyone know what the estimates are for the restatement?

Its not if the act was or wasn't illegal, it is more of an ethics issue. Believe me I have witness first hand a recent market scandal. I worked for a financial company that was investigated for "market timing" the overall gain of the unethical activities was around 200k split between a handful of portfolio managers. It ended up costing the company millions in fines, and loss of reputation.

[m-dogg]

Apple is not the only one that is running into these problems. Dell and Microsoft are on the hook as well. Apple, being the darling company, is just today's poster child.

For some reason, I believe that Dell and MS will have more problems getting this fixed than Apple will. And will take alot more flak considering their current stock price.

This isn't something isolated to tech companies either. There are other companies in other industries that are facing these issues as well...

[suwandy]

Does this also mean that MMB and MMBP will be available soon? (after they solved the stock problems?) Or is it a completely unrelated issue?

[andrew050703]

I misread the title on the main page as 'CEO resigns' - had a horrible feeling in my stomach until i read that as 'CFO resigns'.

guess that means i'm a steve zealot?

[MikeTheC]

It seems to me like the stock market is full of people who feed off their own hype, stupidity and emotion.

I think the big thing is that, apart from not finding any of the current board culpable, Steve has publicly accepted responsibility, acknowledged, and apologized for the situation. It's an act of good faith that truly takes the wind out of the sails of anyone wishing to destroy Apple or it's leadership.

[bazzalisk]

If I'm reading this right, the problem is that Apple options were priced on the wrong date-- wrong in the sense of, uh, illegalish. Not sure how many shares we're talking about here, but restating this would just be a matter of the number of shares granted times the difference in price between the dates plus whatever penalties get attached, right?

The penalties could be quite large. Since such things are hard to catch when they happen the government tries to make them unprofitable by making the penalty when they are caught quite large -- knowing that much of the time such people are getting away with it.

[blackstarliner]

The reason why the ex-CFO resigned, I presume, was that the SOX regulations make the individual in charge of accounting personally responsible for financial procedures and any 'irregularities' that may exist within it. If the period of alleged 'wrongdoing' was 97-02, it seems likely that this chap was in charge of the books at the time. The SOX act provides for 'certifiers' along the management chain to actually sign a statement saying that all is good and proper (amongst other things elsewhere in the financial reporting areas). Even the guys in charge of the IT systems have to make sure that the processes fit in with the stated accounting procedures. It has to be signed off twice yearly. There's a current SOX certification run taking place at US-listed companies right now. The idea is to protect the shareholder from his share of the profits (paid in dividends) being back-handed without approval at the AGM, or worse, the companies lying about their real financial status to prop up their rating and share price and hence 'value'.

'Retiring from the board' is no biggie, happens all the time, but it's not impossible (at all) that prosecutions and fines will follow, but that's a matter for the courts to decide I suppose. Better to spend more time with the family now I guess.

The inquiry indicates that there was alleged 'wrongdoing' during a 5 year period, but how much of that is covered by the SOX act I don't know, not that it makes much difference, as Apple (and all the others) will be keen to open it all up to clear the air anyway. If you are a shareholder this is good news I think.

[billyboy]

well it could have been worse i guess. I hope the stock doesn't get hit in the near future though

I hope the stock gets slaughtered but only because I sold at the equivalent of $19 a share when it was on the rise and seeing it low again wouldnt make me feel like such a loser.

[IJ Reilly]

I hope the stock gets slaughtered but only because I sold at the equivalent of $19 a share when it was on the rise and seeing it low again wouldnt make me feel like such a loser.

Oh, thanks. Please be sure to let me know when you can use a favor.

[Sun Baked]

Yup, looks like all that hand wringing over a SEC investigation was rather overzealous. Not much ot see here.

Wonder how Dell's investigation will come out?

Doesn't look too good for Dell, went from an informal probe to a Formal SEC Investigation today.

Look's like something got messed up besides the stock timing, since it "may" be unrelated to the current informal inquiry. :eek:

Of course, the issue for the execs just got a bit stickier last week since the IRS is also going to hammer the shifty execs for the irregularities ....

Backdating Issues Create a Taxing Situation in More Than One Way (http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1163066720664)

A exta tax 20% penalty for those found 'in the soup' and the states may also impose an additional tax for these options. :D