SEC To File Charges Against Ex-Apple Execs Soon?

Discussion in ' News Discussion' started by MacRumors, Feb 16, 2007.

  1. MacRumors macrumors bot


    Apr 12, 2001

    According to a report by the Wall Street Journal (paid subscription required), SEC investigators are closing in on bringing criminal charges against former Apple executives.

    Apple's independent investigation had found "serious concern" regarding two former officers, which were later identified as former CFO Fred Anderson and former general counsel Nancy Heinen.

    On a positive note, the report mentions only ex executives as likely to be indicted at this time. The SEC has questioned Apple CEO Steve Jobs on at least one occasion, and some were worried that he could become embroiled in the scandal. Apple itself had cited the SEC investigation as one of the risks that it faces in improving financial performance in the future (i.e. the fear being that the investigation could be costly and distracting, hindering profit margins).

    Apple is not alone, with the report also naming Broadcom, Monster, McAfee, and others as also having their investigations proceeding.
  2. Grimace macrumors 68040


    Feb 17, 2003
    with Hamburglar.
    Let's hope Steve stays out of trouble on this one. Changing top management right now would not help Apple's gaining momentum.
  3. justflie macrumors 6502a


    Nov 29, 2005
    Red Sox Nation
    I think (and hope) this will be the extent of the SEC troubles. They'll finally have some people to officially blame and hold accountable, showing the world that even rich execs can't get away with blah blah blah make an example of them blah blah. Whatever, as long as the current leadership stays in place and keeps thinking of the future, it's fine by me.

    But wait, I thought people were saying that backdating stock options was legal, just frowned upon. Did these two do some other shady business?
  4. Twenty1 macrumors member

    Feb 23, 2006
    I don't know much about the details of the case, but it just sounds like Steve may have done some things that were unethical but not illegal. It's bad to say, but it probably happens more times than not in large corporations.
  5. IJ Reilly macrumors P6

    IJ Reilly

    Jul 16, 2002
    Backdating options is legal, they just have to be accounted for properly, as an expense. This is why Apple took a charge against past earnings as a result of their internal investigation.

    Does anyone have a WSJ subscription?
  6. zwida macrumors 6502a


    Jan 5, 2001
    Because I'm guessing it's frowned upon to post the entire article (which is essentially about Broadcom anyway) in the forum, here is the relavent info about Apple:

    "The government is nearing charges against a former official of computer-security company McAfee Inc., say people familiar with the situation, and is strongly considering bringing cases against ex-executives of Apple Inc. and semiconductor-equipment maker KLA-Tencor Corp. In St. Louis, at least one former executive of Engineered Support Systems Inc., a defense contractor now owned by DRS Technologies Inc. of Parsippany, N.J., has been told of a likely charge, says a person close to the matter."

    And the last paragraphs that kind of wrap things up:

    "Another obstacle for the government in prosecuting backdating is at some companies the practice was discussed openly, making it harder to argue that executives knew they were engaged in wrongful conduct.

    Defense lawyers will doubtless pass blame around. Those representing CEOs are likely to argue that their clients -- being business leaders, not accountants -- relied on others to figure out how options should be issued and accounted for. Those representing subordinates are likely to argue that the boss made them do it.

    Helping boost momentum toward the filing of charges is the statute of limitations. It's five years for securities fraud and wire fraud. But there's some flexibility, based on the notion that misdated options might affect earnings in later years."
  7. twoodcc macrumors P6


    Feb 3, 2005
    Right side of wrong
    i think it will be ok as long as Steve isn't hurt in any of this. i just hope this gets over with quick....
  8. thejadedmonkey macrumors 604


    May 28, 2005
    Let's all prey for steve.. what is he, some sort of demi god or something?

  9. spicyapple macrumors 68000


    Jul 20, 2006
    I found that quote funny. :)

  10. iSee macrumors 68040


    Oct 25, 2004
    Uh oh.
    They always start with lower down people, apply preasure in the form of the threat of jail time, and get them to implicate the higher-ups. I hope this doesn't go that far...
  11. Rocketman macrumors 603


    I have a problem with the prosecutors here for several reasons. The primary motivations for prosecution is central to the prosecutors not the "victims" (what victims?), the public (who cares really?), or the courts.

    The PROSECUTORS have looked long and hard to find SOMETHING wrong. You know what it took? It took a change in how stock options back-dating was viewed by accountants and the law. It took an arbitrary change in how procecutors selectively enforce this issue. It took an issue "easy enough to catch criminals" that they openy admitted their actions. They THOUGHT THEY WERE LEGAL.

    They had past practice to see and point to. They had accountants passing on the practice which should be the ONLY issue here. They had corporate leadership not only in their company but peer and near-peer companies doing similar actions.

    Why is it when a practice changes and becomes criminalized, the prosecutors choose to do "get-cha" and make an example of folks, rather than simply sending out a few letters and say from now on stop doing this?

    It would be a lot more effective, would not suck dozens of otherwise good folks into the criminal justice system, and would have a far more rapid, widespread and effective result.

    The answer?

    This is about jobs for procecutors, ego events and political points for prosecutors. This is NOT being done for the public or the stockholders.

    When a person is issued stock options it is compensation for value provided to the firm, and by reference to the public. Exercising those options is an event which is only noted when they are successful and profitable. What about all the folks whos options have become worthless?

    Stockholders are not protected when a prosecutor soils the company's name or news cycle with allegations of wrongdoing, so the very folks PROSECUTORS caim to be protecting, are injured by the act of the prosecutor and not injured at all by the alleged wrong act, even if actually wrong!

    Prosecutors gone wild! This is not the only area in society this is a problem, but it is perhaps one of the most obvious because the government official overtly harms the victim to "aid" them in the process of collecting professional points for themselves.

    The options dating acts INCREASED income taxes to the treasury. Do they get a refund with interest and penalties commensurate with what IRS charges??

  12. dernhelm macrumors 68000


    May 20, 2002
    middle earth
    I thought the SEC guys were already trying to prey on him... :D
  13. AdeFowler macrumors 68020


    Aug 27, 2004
    Apple must be regretting this whole fiasco. It's dragged on for so long now and shows no sign of reaching its conclusion any time soon.
  14. IJ Reilly macrumors P6

    IJ Reilly

    Jul 16, 2002
    That's what I was hoping to see -- thanks! :)
  15. Free2B macrumors newbie

    Aug 30, 2006
    most of this is a witch-hunt

    The WSJ has been so overboard on this whole options thing, and IMHO, is just reaching for a story to tell. The following is a quote from the article in question:

    "It also violated the rationale of stock options. They give recipients a right to buy stock in the future at the price when the options are granted, so that recipients can profit only if the price of their company's stock goes up. Setting a lower "exercise price" for the options gives recipients a head start on profiting."

    Violated the rationale of stock options? That is such a ridiculous argument. The issue is still one of compensation, which options are a part of. In theory, yes, options were designed to align managment's incentives with the future performance of the business. But in reality, they are also a way of rewarding execs (and employees) for their PAST service to the company. Many employees, not just senior execs, get options. Do they think giving options to a lower level employee is really for future performance? Give me a break. Most of us at junior levels will never move the needle of stock performance with our actions at a company. They are a REWARD, or simply, another form of compensation.

    Most of this options backdating case is an example that the press can, and does, wield enormous power to influence the public. It can be used as a tool to inform the public, or it can be used to whip them into a frenzy over something that really is a non-issue. The choice of language the writer uses in this article is inappropriate and imparts their own biased judgment of the issue. People who don't know the facts are easily swayed by these words. Ultimately, this is just for the reporter's own personal gain and notoriety. Now, tell me, who is really the corrupt one?
  16. dernhelm macrumors 68000


    May 20, 2002
    middle earth
    So the WSJ thinks that options are a form of company sponsored gambling, and they fervently hope that people they given them to don't make too much money? Or don't start making money too soon? That's complete idiocy! Options are a standard way for companies to reward employees at a high enough level - and are viewed as necessary compensation by any company hoping to attract good people.

    What the WJS doesn't understand is that backdating options is not illegal. What is illegal is backdating them for the employees, but reporting a different value to the SEC. The value of the stock as it was optioned has a definite impact on the bottom line of a company's stock. Some people have pointed out here that even if the wrong value was reported to the SEC, the employees paid more in income tax "so it's all a wash", but these people are completely missing the point. If we have learned anything from Enron, its the fact that corporate governance matters. You cannot and should not be allowed to make your company look more profitable, or have a higher market cap, or have a stronger stock than it really does.

    So yes, what Apple did is a big deal, not because of the idiotic blathering put out by the WSJ, but because they showed poor corporate governance. Then they lied, then they lied about lying, and then they made up pretend meetings to cover up the fact that they lied about lying. You don't do that stuff unless you are dead certain you were wrong, and you're hoping to get away with it anyway.

    And for me at least, anyway you look at it, a little shine was taken off the Apple because of this.
  17. BenRoethig macrumors 68030


    Jul 17, 2002
    Dubuque, Iowa
    If it were Eric Schmidt I don't think it would hurt that much. He seems smart enough to continue with Steve's policies. His more open minded nature might help in the future.
  18. Maestro64 macrumors regular


    Jan 5, 2005
    You know this stuff has been going on for years and no one would have complained if it was not for Enron and Worldcom. They brought attention to this who subject and no one would have careless that apple and other companies who were making lots of money was doing this.

    As some one pointed out, the SEC is on a witch hunt to show the public they are doing something to make sure Enron will not happen again.

    For anyone who has dealt with Government regulation will tell you they are very vague and miss leading at times. If you ask the government to tell you what they mean they will tell you, they can not tell you, and you will have to develope a policy to address the law or regulation and follow it and at some time in the future if they felt you were wrong they will come after you. They will never tell you if you got it right, but they will come after you real fast if you got it wrong.

    This is what happen with the whole stock option thing, they had rules, they were not clear companies and individuals interrupted them in their favor and now the SEC said you were wrong and will pay.

    No different in doing your taxes. Call the IRS up and ask them if you can write something off on your taxes, you'll get 10 different answer and if you get audited, it does not mater what they said before or your accountant thinks, the auditor has the final say.
  19. Maestro64 macrumors regular


    Jan 5, 2005
    I do not think apple lied, I do not believe there is any evidence say they lied about back dating. They come out first to inform the investors that the found evidence that back dating occurred. That is when the SEC got involved. Remember Apple was not on the SEC original list. Also at about the same time Apple told the investment community this happen. two Prof from some university did analysis of a bunch of companies including Apple had evidence that back dating was occuring. Remember, all options that are granded to execs are part of their SEC files and the Prof. used that data and found that the stick prices match the lows during that period of time. This information has been in the public for years, but no one bother to look at it or cared about it.

    Making up the meeting was done becuase the internal policy says that all stock grants must be approved by a meeting of the board. and if you going to backdate you have to show they were approved by the board on the day you are claiming the grant was given.
  20. dernhelm macrumors 68000


    May 20, 2002
    middle earth
    I never meant to claim Apple lied about the backdating. But the definitely lied about the meeting that never occured (oops), and little "untruths" keep popping up in statements made by various Apple execs about who knew what. I understand that they made up the meeting in order to cover for the fact that they didn't have one even though their own policy says they MUST. But all that does is point at a company trying to cover its tracks.

    My personal feeling is that SJ knew about the backdating, but probably did not know about the mis-reporting because, let's face it, he has better things to follow up on than how options were being reported to the SEC.

    But Apple doesn't feel like they can say that SJ knew about the backdating without making him look guilty of fraud. And its all the little white lies, and fabricating of meetings and all the hooey that bugs me. SJ is human, but Apple does want him seen as fallible, and they are so worried about his image, they may end up doing something stupid just in order to protect that.
  21. Peace macrumors P6


    Apr 1, 2005
    Space--The ONLY Frontier
    snippet :

    The meeting DID occur.The date of the meeting is what was falsified.
  22. IJ Reilly macrumors P6

    IJ Reilly

    Jul 16, 2002
    When did the meeting actually occur? And if it did actually occur, then why was the date falsified?
  23. iMikeT macrumors 68020

    Jul 8, 2006
    If they're going to go after former Apple execs., they should start with John Sculley.
  24. Apple Corps macrumors 68020

    Apr 26, 2003
    God help us - it looks like we are going to go around in circles on this one again. The relevant case law and facts will drive the DOJ decision on what to do.
  25. GregA macrumors 65816

    Mar 14, 2003
    Sydney Australia
    It is legal to back date options, but when you do it I believe it devalues your shares every so slightly.
    So instead of (for example)
    a) Apple pays an employee $1million, they
    b) pay the employee $100k + backdated options which are worth $900k instantly.
    On the Apple books, option (b) is a much lower expense which looks good. The company is still worth $Xbillion, but someone just got to buy shares really cheap so shareholders shares just reduced a little bit because of the share slight-of-hand. In fact, the amount their shares reduced is probably the same amount they would have reduced if Apple had had an unforseen expenditure of $1million (payment to the employee). (and $1mill would be negligible, of course).

    So it all comes down to reporting what they're doing. If you owned 10% of a $1mill company that has enlisted a consultant for a $100k job, would you prefer to find out they
    1) were going to pay the consultant $100k
    2) were going to issue 10% of the company shares to the consultant (so now you only own 9% - but the company didn't have to pay $100k)
    3) the consultant was paid $40k and issued backdated options saying they could pay $40k for 10% of the company, which is really worth $100k straight away (this will also reduce the value of your shares).
    or I guess
    4) you're told they were paid $40k and given options for their report. 2 years later you find out the options were backdated at the time and was really worth $100k.

    Financially, it all seems pretty similar.
    That's my understanding. I'd greatly like to know if that's roughly correct (I know my maths above simplified a few % issues!)

    ps. Don't quote me as knowing what I'm saying! :).

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