Apple Releases Financial Results, Discusses Options Scandal

[VIREBEL661]

Well said dashiel. Well said.

A lot of this scandal is somewhat overblown - I think it'll be fine... You have to wade through a lot of FUD - Apple news seems to always be higher profile than others - as long as Apple keeps on truckin', I'm a happy camper...

 

[islanders]

I don’t understand anything about stock options, so let me ask.

Did Jobs profit from this back dating while shareholders were denied, or was this some kind of way to get out of paying taxes, or anything unethical?

If there was a discrepancy was this acknowledged and whatever the amount was corrected, and when did this correction happen if there was in fact a discrepancy? 2006?

Sounds like they straightened this out before a federal investigation, so everything has been resolved from a legal point of view.

Should someone call CNN and let them know Mac Rumors has fully exonerated Jobs and Gore so there is nothing else to report?

As long as he doesn’t get handcuffed, hosed down and put in a jump suit with flip flops no one else is going to care about any of this except Mac enthusiast.

 

[itcheroni]

I don’t understand anything about stock options, so let me ask.

Did Jobs profit from this back dating while shareholders were denied, or was this some kind of way to get out of paying taxes, or anything unethical?

If there was a discrepancy was this acknowledged and whatever the amount was corrected, and when did this correction happen if there was in fact a discrepancy? 2006?

Sounds like they straightened this out before a federal investigation, so everything has been resolved from a legal point of view.

Should someone call CNN and let them know Mac Rumors has fully exonerated Jobs and Gore so there is nothing else to report?

As long as he doesn’t get handcuffed, hosed down and put in a jump suit with flip flops no one else is going to care about any of this except Mac enthusiast.

I'll try to summarize the basic info as best as I can; people feel free to correct my mistakes(as if I needed to say).

Options are options to buy a stock. For example, Aapl is $80 but you don't want to buy 100 shares of Aapl for $8000. You can buy the option to buy Aapl at $80 for (let's say) $5. So you will pay $500($5x100) for the option to buy 100 shares of Aapl at $80. Why? Because if Aapl goes up to $90, you can exercise the option and buy Aapl for $80 and immediately sell it for $90 or just keep it. Or you can sell the option itself which has also gone up proportionately.

CEOs are often paid in options, that's why Jobs works for a $1 salary, and it's what motivates them to try and bring up the stock.

The issue most likely is not be whether Jobs profited from the backdating but whether that backdating was illegal. If so, Jobs and others may be liable for wrongdoing. All today's report says is that they(Apple) are confident in no wrongdoing. It essentially has no effect other than to give stockholders more confidence in holding.

By the way, an "honest" mistake concerning statutory violations usually just equates to pleading guilty. A violation is a violation. The judge may of course exercise discretion based on the circumstances, but s/he still must state their reasoning.

 

[islanders]

I'll try to summarize the basic info as best as I can; people feel free to correct my mistakes(as if I needed to say).

Options are options to buy a stock. For example, Aapl is $80 but you don't want to buy 100 shares of Aapl for $8000. You can buy the option to buy Aapl at $80 for (let's say) $5. So you will pay $500($5x100) for the option to buy 100 shares of Aapl at $80. Why? Because if Aapl goes up to $90, you can exercise the option and buy Aapl for $80 and immediately sell it for $90 or just keep it. Or you can sell the option itself which has also gone up proportionately.

CEOs are often paid in options, that's why Jobs works for a $1 salary, and it's what motivates them to try and bring up the stock.

The issue most likely is not be whether Jobs profited from the backdating but whether that backdating was illegal. If so, Jobs and others may be liable for wrongdoing. All today's report says is that they(Apple) are confident in no wrongdoing. It essentially has no effect other than to give stockholders more confidence in holding.

By the way, an "honest" mistake concerning statutory violations usually just equates to pleading guilty. A violation is a violation. The judge may of course exercise discretion based on the circumstances, but s/he still must state their reasoning.

Thanks for the explanation. I sure am learning a lot here.

So if they were dated back when they were at worth less, then they would be worth more at the date they were sold or traded for cash or some other commodity of value?

Kind of convenient that the two people who were responsible are no longer working there.

Wonder what they might have to say?

 

[itcheroni]

Thanks for the explanation. I sure am learning a lot here.

So if they were dated back when they were at worth less, then they would be worth more at the date they were sold or traded for cash or some other commodity of value?

Kind of convenient that the two people who were responsible are no longer working there.

Wonder what they might have to say?

I think the problem is that they fabricated board approval. If anyone knows the reasoning for this, please advise because it doesn't make sense to me. Could they just not get a meeting together or something? How will they explain to the SEC that they didn't know they were doing anything illegal when they're falsifying records?

 

[Doctor Q]

The political discussion based on this news story is now in a separate thread. Please use this thread for discussion about Apple and its finances, and the separate thread for the political discussion. Posts made in the wrong forum will be removed.

Thank you.

 

[cygnusx1]

Here's what's going to happen.

Sometime next week, probably Wednesday or Thursday evening either the U.S. Attorney or the SEC will file complaints and subpoena Fred Anderson, and Nancy Heinen (maybe also Jerome York and the 2 other members of the 2001 Executive Compensation Committee)(maybe they'll just convene a grand jury). Anderson is definitely up the creek because he signed the 2002 10K that stated that the 7,500,000 options granted to Jobs were priced as of the date of the grant. But we now know that the options were granted (if you can call it that) in December 2002. Moreover, it is possible that, notwithstanding the statements issued by the Board today, the Executive Compensation Committee never agreed to grant the options at the Board meeting in August 2001. Ergo, Jobs, as Chairman of the Board, granted the options to himself in December 2001 or later and then conveniently 'recommended' to Anderson or Heinen that they be priced just prior to the release of the original ipod. (If that's the case then all of the 2001 Board Members have got a huge problem for failure to protest/resign when the public filings were made in '02).
Then when they've got Anderson or Heinen sweating some possible jail time, the prosecutors will try to strike a deal for their testimony that Jobs was aware and directed the backdating of options to himself. If they are able to get that, the rest should be fairly academic. Although the options were underwater at the time that they were cancelled they had ten year expiration dates and were worth a lot of money (Black Scholes). The options were cancelled and replaced with restricted stock, which restricted stock Jobs recently cashed out for several hundred million dollars.
It's unfortunate that this company's going to get crushed. They are after all one of the few natural enemies for Microsoft. But if the DOJ and SEC let this one go, they may as well pack up and go home, b/c there are hundreds of other cases they are investigating that are not nearly as egregious or as high profile (prosecutors love to take down the big dog) as this one.
Oh, plus there are the Pixar issues that Jobs has to deal with. Looks ugly.

 

[MasterJediDan]

Huh? That was the end of the Apples "internal" investigation about the matter. That has nothing to do with a Gov't investigation.

yeah, but at least it's good news from somebody. Hopefully everything is as Apple says it is so we can cheer on Jobs at MWSF.

 

[islanders]

If this was all resolved and shareholders didn’t get cheated then we can’t be talking jail time here for anyone over one documet.

I can’t see shareholders filing anything against Jobs. Why on earth would they do that?

But perhaps the ones that bought and sold during this time didn’t benefit from the late correction some 4 years later, and they might have a gripe? But if they do, Apple is a reputable company and always corrects any mistakes.

That’s the only conflict I see, but mistakes can happen also, and a few documents is a lot different that a track record of greed and corruption where innocent inversters were exploited out of their life savings.

 

[AidenShaw]

If this was all resolved and shareholders didn’t get cheated then we can’t be talking jail time here for anyone over one documet.

Well, the lawyers filing the class action lawsuits will disagree.

I can’t see shareholders filing anything against Jobs. Why on earth would they do that?

$

Apple is a reputable company and always corrects any mistakes.

Bull****. Every class action lawsuit that Apple has lost is proof that they only care about the profit/loss equation....

 

[islanders]

"AidenShaw;3191596]Well, the lawyers filing the class action lawsuits will disagree."


Not when the grievance has been settled in full. It’s called mitigation.

"$"


Exactly, they want their stocks to plunge, duhh. Thaks for making my point.


"Bull****. Every class action lawsuit that Apple has lost is proof that they only care about the profit/loss equation...."


Yeah, I see your point now. No, specifics, just BS, lets see you and some others provide some individuals who have been convinced for one document?

What does a class action lawsuite have to do with any of this?

Like I said specifics please, or your the one who is full of it.

 

[Flowbee]

Speaking of lawsuits, the SEC filing also reveals information about three new ones: One over iPod integration with iTunes; Another claiming patent infringment over the Nike+iPod Sport Kit; and a third that deals with the iBook G4's flaky motherboard.

Read the news story here.

 

[islanders]

Speaking of lawsuits, the SEC filing also reveals information about three new ones: One over iPod integration with iTunes; Another claiming patent infringment over the Nike+iPod Sport Kit; and a third that deals with the iBook G4's flaky motherboard.

Read the news story here.

Thanks for the link but that sounds like good news to me. When people complain about Apple having a monopoly, that’s the kind of problems every company wants.

The rest of it sounds like business as usual, and each discrepancy has nothing to do with each other.

 

[gnasher729]

I think the problem is that they fabricated board approval. If anyone knows the reasoning for this, please advise because it doesn't make sense to me. Could they just not get a meeting together or something? How will they explain to the SEC that they didn't know they were doing anything illegal when they're falsifying records?

Depends how this happens. A decision was made to grant share options on a certain date. It can't have been done against the will of the board, because they would have asked questions later - maybe everyone was asked over the phone informally whether they agreed, even though a board meeting was required. (Even if the board at a company is bought and agrees to everything the CEO tells them, the board members would still raise a major stink if we weren't asked to agree).

Someone then had to fill out the paper work. That person might have known that approval in a formal board meeting was legally required, and therefore made the wrong assumption that the formal board meeting had actually happened and wrote everything down accordingly.

So person A did not know that a formal board meeting was the legal requirement. Person B who did the paperwork knew it was a legal requirement and therefore assumed it had happened. If Person B had bothered to ask this would have happened: "You had a formal board meeting, didn't you?" "No, we didn't, that's not required." "Oh yes, it is required, I can't fill out the forms otherwise." "Damned, I have to get all these people together next week then." and Steve Jobs would have got the grant a week later.

But you can be sure that all board members had been asked to agree to the grant and did agree.

 

[gnasher729]

But perhaps the ones that bought and sold during this time didn’t benefit from the late correction some 4 years later, and they might have a gripe?

The ones who bought and sold years ago assumed that the company was worth a tiny bit more than it actually was. So they paid a little bit too much for the shares, but they also received a little bit too much when they sold, so there was no actual harm done.

The only ones who would have been harmed were those who bought before Apple reported problems of unknown size; and were holding shares when Apple first announced the problems. As Apples share price went, all these people made enormous profits.

 

[Gusman]

. . . Moreover, it is possible that, notwithstanding the statements issued by the Board today, the Executive Compensation Committee never agreed to grant the options at the Board meeting in August 2001. . . .

I think you forgot about the part where Gore and all current directors are jailed for continuing to lie and coverup, pretty courageous of them to stick their integrety, fortune as well as their freedom on the line just to buy S. Jobs another 6 months before jail time sets in.

You have any other imagined, what if senerios you want to share with us?

 

[cygnusx1]

Gore was not on the board at the time of the grants. So he doesn't have first hand knowledge about what occurred. York was on the board at the time and would have an incentive to cover his @ss.
Heinen left the company in May and has not been available to provide input into the internal investigation. Given that she (the legal department) was probably responsible for drafting the board resolutions, her input/testimony will be necessary to clear things up.

But at the very least based on the info provided by the Board yesterday and based on public filings it appears that there is a high probability that the following is accurate: (i) Jobs received, with knowledge, backdated options; (ii) which backdated options were later exchanged for restricted stock, and (iii) Jobs recently cashed out the restricted stock for hundreds of millions of dollars, thereby profiting from the award of backdated options.I
If any of this is incorrect, please advise.

 

[Gusman]

Gore was not on the board at the time of the grants. So he doesn't have first hand knowledge about what occurred. York was on the board at the time and would have an incentive to cover his @ss.
Heinen left the company in May and has not been available to provide input into the internal investigation. Given that she (the legal department) was probably responsible for drafting the board resolutions, her input/testimony will be necessary to clear things up.

But at the very least based on the info provided by the Board yesterday and based on public filings it appears that there is a high probability that the following is accurate: (i) Jobs received, with knowledge, backdated options; (ii) which backdated options were later exchanged for restricted stock, and (iii) Jobs recently cashed out the restricted stock for hundreds of millions of dollars, thereby profiting from the award of backdated options.I
If any of this is incorrect, please advise.

The 3 points above are uncontested. Though I should add, Jobs received the restricted stock grant as compensation for his work at Apple. Basically, he does not draw a salary. The option grants were still worthless at the time of their being surrendered. Given the success of his work, even though the stock was down during that period (there was a lot of other stuff impacting the stock market going on that Apple had no control over, e.g. 9-11, Iraq invasion, etc) the Board chose to give him something of guaranteed minimum value. As with any shareholder he has enjoyed the 10-15 fold increase in stock price since.

The Board of Apple included this direct quote in their filling

The grant dated October 19, 2001 was originally approved at a Board meeting on August 29, 2001, with an exercise price of $17.83.


Do you question whether they included this? If not, the current Board, is reponsible for its accuracy. If true, while not eliminating the seriousness of falsifing a Board meeting, it does remove the question of whether the company knowingly and intentionally agreed to the grant, whether it was dated August, December, or October.

 

[islanders]

So the board should have simply wrote him a check instead of backdating options?

And has it been resolved? Do any of the shareholders or ex-shareholders have a grievance? And will this be settled in a civil suit.

I still haven’t seen the proof or a criminal case here that would result in drastic punishment, as some of you are suggesting. So, I’ll ask again, what other employees and CEO of a company like Apple has been convicted and sentenced for the exact same discrepancies?

This is looking more like a fine to me, and a “strike one” warning.

 

[IJ Reilly]

So the board should have simply wrote him a check instead of backdating options?

In effect, yes. The company needs to account for the value of "in the money" options as cash compensation, and therefore as an expense. They pull the back-dating trick in an effort to avoid full disclosure.

And has it been resolved? Do any of the shareholders or ex-shareholders have a grievance? And will this be settled in a civil suit.

I still haven’t seen the proof or a criminal case here that would result in drastic punishment, as some of you are suggesting. So, I’ll ask again, what other employees and CEO of a company like Apple has been convicted and sentenced for the exact same discrepancies?

This is looking more like a fine to me, and a “strike one” warning.

I absolutely would not count on that. Four shareholder suits have been combined into one class action which will be heard in a court in San Jose. Further, the SEC has not been heard from yet, so this is by no means over. If federal prosecutors decide to run with any of this, they will almost certainly latch onto the statement in Apple's report that Steve Jobs knew about the back-dating, but claimed to have no understanding of the accounting implications. This strains belief, and sounds suspiciously like the Ken Lay defense. It didn't work for Lay, where far more complicated financial dealings were involved, and I would not expect it to work for Jobs.

 

[islanders]

In effect, yes. The company needs to account for the value of "in the money" options as cash compensation, and therefore as an expense. They pull the back-dating trick in an effort to avoid full disclosure.



I absolutely would not count on that. Four shareholder suits have been combined into one class action which will be heard in a court in San Jose. Further, the SEC has not been heard from yet, so this is by no means over. If federal prosecutors decide to run with any of this, they will almost certainly latch onto the statement in Apple's report that Steve Jobs knew about the back-dating, but claimed to have no understanding of the accounting implications. This strains belief, and sounds suspiciously like the Ken Lay defense. It didn't work for Lay, where far more complicated financial dealings were involved, and I would not expect it to work for Jobs.

Thanks for the response.

But what happened to Enron is not the same situation at all with Apple.

This is an isolated event, and I wish someone could help put this into context.

Apple has admitted the discrepancy, has resolved the financial statement, and has the capacity to resolve any civil law suite. Enron went bankrupt and knowingly swindled people out of their life savings.

So wouldn’t a fine and warning be appropriate?

 

[mccoma]

Apple is probably the lowest on the list

If you take a survey of the companies in silicon valley that are having issues (it looks like the count is now in the hundreds), Apple is probably the least of the SEC worries. The adjusted filing was less that 1% of Apple's profits over the time period. Apple actually started their own probe and (skip the politics on this one) had a former VP sign off on it. It looks like the fall guys have already been identified and the current people are ok.

This is not Enron or Worldcom. Those killed people's retirement funds. Apple had a blip and looks like it is headed back up.

In the coming weeks you are going to see news from a lot of other companies and their news will not be that rosy.

 

[IJ Reilly]

Thanks for the response.

But what happened to Enron is not the same situation at all with Apple.

This is an isolated event, and I wish someone could help put this into context.

Apple has admitted the discrepancy, has resolved the financial statement, and has the capacity to resolve any civil law suite. Enron went bankrupt and knowingly swindled people out of their life savings.

So wouldn’t a fine and warning be appropriate?

Who knows? We're in an entirely new environment (post-Enron) where board room misdealing are concerned. The Enron situation itself was obviously different, and far, far more serious -- but the Jobs defense is eerily similar. If Jobs gets caught in a web of "should have known," or even worse, "did know but claims ignorance," then I can see him being forced to step down. We're obviously not there yet, but keep in mind admitting wrongdoing is not the same as being exonerated for wrongdoing. Apple can't give themselves a pass. Only the SEC and the courts can do that.

 

[IJ Reilly]

If you take a survey of the companies in silicon valley that are having issues (it looks like the count is now in the hundreds), Apple is probably the least of the SEC worries. The adjusted filing was less that 1% of Apple's profits over the time period. Apple actually started their own probe and (skip the politics on this one) had a former VP sign off on it. It looks like the fall guys have already been identified and the current people are ok.

This is not Enron or Worldcom. Those killed people's retirement funds. Apple had a blip and looks like it is headed back up.

In the coming weeks you are going to see news from a lot of other companies and their news will not be that rosy.

True, but Apple being in even worse company does not improve their situation where the law is concerned, and all the mea culpas in the world don't cut much ice with federal prosecutors. They very well might want to make an example of somebody, preferably a prominent somebody, and Apple and Steve Jobs might just be the big fish they're looking for. We just don't know.

 

[islanders]

Who knows? We're in an entirely new environment (post-Enron) where board room misdealing are concerned. The Enron situation itself was obviously different, and far, far more serious -- but the Jobs defense is eerily similar. If Jobs gets caught in a web of "should have known," or even worse, "did know but claims ignorance," then I can see him being forced to step down. We're obviously not there yet, but keep in mind admitting wrongdoing is not the same as being exonerated for wrongdoing. Apple can't give themselves a pass. Only the SEC and the courts can do that.

No way Jobs is going to be asked to step down. Ain’t gunna happen.

Me asking what the appropriate penalty for this in context to similar situations, should not suggest that I think they have been fully exonerated by SEC.

I don’t see the connection to Enron.

Yeah, Jobs is a big dog, but he has teeth too, and isn’t going to be pushed around by an overzealous prosecution.

This is a very legitimate company.