Apple report fails to end stock-option controvesy
CEO Jobs is cleared, but questions remain about his role in backdating grants.
Apple Computer Inc. on Friday cleared Chief Executive Steve Jobs of wrongdoing regarding its improper handling of stock options, but new details from an internal investigation only fueled controversy.
The company revealed that Jobs "was aware or recommended" the selection of favorable dates for stock options awarded to other executives, although he didn't personally profit or "appreciate the accounting implications" of the practice, according to a filing with the Securities and Exchange Commission. Previously, the Cupertino, Calif.-based technology giant said only that Jobs had been aware of the backdating but didn't personally benefit from it.
Apple also disclosed that a special board meeting in which directors were said to have approved an improperly dated option grant to Jobs never took place.
The disclosures could mean that questions regarding the backdating of options at Apple and Jobs' role in it won't go away any time soon, despite the company's effort to put the matter to rest, an industry expert said.
"The company is desperately trying to make us believe that just because [Jobs] wasn't self-dealing directly and because they've come clean and done a thorough investigation, that this is OK," said Christopher Whalen, managing director of Institutional Risk Analytics, a Hawthorne-based financial research firm.
"The problem is that it might not be. We don't know how the SEC or other authorities are going to react to these disclosures."
In the filing, Apple held to its previous claim that the three-month probe by a special board committee had found no wrongdoing by Jobs or other members of its current management.
"The board of directors is confident that the company has corrected the problems that led to the restatement, and it has complete confidence in Steve Jobs and the senior management team," former Vice President Al Gore, chairman of the committee, and Jerome York, chairman of Apple's audit and finance committee, said in a joint statement.
The current scandal over option backdating has ensnared more than 180 U.S. companies and claimed the jobs of several high-level executives, including Bruce Karatz, then head of Los Angeles home builder KB Home.
Investors have fretted that the issue could potentially unseat Jobs, who is credited with reviving Apple's fortunes with such popular products as the iPod music player.
But Wall Street appeared reassured by the board's strong support for Jobs and the news that correcting the option backdating would require it to reduce its previously reported earnings by $84 million a relatively small amount for a company that earned almost $2 billion in its fiscal year that ended Sept. 30.
Apple's stock, which had dropped almost 12% in the last month as concerns about the option issue grew, jumped almost 5% on Friday. Several stock analysts and portfolio managers expressed hope that the company would now be able to put questions behind it.
Options are rights to buy stock at a set price within a certain time period. The price of stock to be bought using an option is generally the stock's market price on the day the option is granted by the company's board.
In their current probes of option practices, regulators are focusing on so-called backdating, whereby option grant dates are changed by weeks or months to coincide with the stock's lowest price in a particular period. Doing so could give the executives instant paper gains on their options. It could also cause a company's financial results to understate compensation costs and overstate earnings.
Backdating isn't necessarily illegal, but failing to disclose the practice in a timely manner is.
In its most detailed account yet of its option practices, Apple said its internal investigation uncovered dating irregularities with 6,428 option awards to various Apple employees on 42 dates between October 1996 and January 2003.
Of two option grants made to Jobs during that period, the company's probe found that an award of options to buy 7.5 million shares was dated Oct. 19, 2001, when the exercise price was $18.30 a share, instead of the correct date of Dec. 18, 2001, when the price was $21.01. The difference could have meant an extra $20 million for Jobs.
That grant, along with one awarded in January 2000 for 10 million shares, was canceled in 2003, when Jobs was given 5 million shares of restricted stock, the company said.
The filing also reported that approval of the 2001 grant to Jobs "was improperly recorded as occurring at a special board meeting on October 19, 2001. Such a special board meeting did not occur."
The filing did not elaborate on the meeting that didn't take place, and an Apple spokesman declined to provide additional details. "Apple's most recent filing creates more questions than it answers," said Christopher Bebel, a former federal prosecutor and SEC counsel. "And many of the assertions serve as a launching pad for 20 Questions.
"It seems clear that the board is trying to whitewash these problems. But in reality, it's wishful thinking. This problem is growing larger with each denial, because the denials are so suspect."
The company's insistence that Jobs was unaware of the accounting ramifications of the backdated option grants given to fellow Apple employees also raised eyebrows.
Apple "has a lot of explaining to do," said former federal prosecutor Jan Handzlik. "This is not a matter of esoteric accounting principles applied to very imaginative and aggressive transactions. This is pretty straightforward."
In its SEC filing, Apple again sought to place responsibility for its option backdating on two departed executives. The company hasn't identified the two, but they are understood to be former Chief Financial Officer Fred Anderson, who resigned from the board four days before Apple announced the results of the internal probe Oct. 4, and former General Counsel Nancy Heinen, who left the company in the spring.
Anderson was not a member of Apple's compensation committee at the time of the 2001 grant to Jobs and "had no knowledge of any impropriety relating to this option grant," Anderson's attorney, Jerome Roth, said in a statement.
Heinen couldn't be reached for comment. She has denied any wrongdoing in the matter.
The U.S. attorney's office in San Francisco, which is conducting a broad probe of option backdating, and the SEC declined to comment on Apple's filing.
At least 11 shareholder lawsuits have been filed against Apple alleging improper option dating. The suits have been consolidated into a single case in federal court in San Jose.
In conducting its inquiry, Apple said, the panel analyzed 42,077 option grants made on 259 dates, examining more than 1 million paper and electronic documents and interviewing more than 40 current and former employees, board members and advisors.
Apple's shares closed Friday at $84.84, up $3.97.
