SEC To File Charges Against Ex-Apple Execs Soon?

[IJ Reilly]

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.

We never stopped going around. The SEC was always expected to investigate Apple's stock options irregularities, just as they are doing for dozens of other companies. It was always going to take months.

It is legal to back date options, but when you do it I believe it devalues your shares every so slightly.

It's actually far simpler. If a company grants an employee the right to buy shares (an option) for $20 per share when the current market price is $25 per share, then the $5 per share difference must be treated as outright compensation to the employee, and must be reported on the company's books as an expense. If they fail to do this accounting properly, then the company's profits will be artificially inflated.

 

[BenRoethig]

We never stopped going around. The SEC was always expected to investigate Apple's stock options irregularities, just as they are doing for dozens of other companies. It was always going to take months.



It's actually far simpler. If a company grants an employee the right to buy shares (an option) for $20 per share when the current market price is $25 per share, then the $5 per share difference must be treated as outright compensation to the employee, and must be reported on the company's books as an expense. If they fail to do this accounting properly, then the company's profits will be artificially inflated.

It gets worse when it officially takes place at board meeting which never happened. That is the part that Steve has to be worried about.

 

[Rocketman]

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).

Actually the reduction is even less. The market value of the stock would have to change appreciably as a result of the transaction to actually matter to the claimed victims, the stockholders. The prosecutions are embarked upon in the name of stockholders and "the people" euphamistically. Something that should be changed about prosecutorial procedure generally.

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! .

The accounting of stock valuation (as compared to company book value) is yet another layer, but that layer is where the "materiality" of the difference between option strike dates and values diminishes in relevence. It is not the company the options owner sells stock to. It is the market. In a market for Apple stock of billions of shares, millions of which are transacted each day, none of which have cost basis' disclosed, the sale of stocks from stock options at an arbitrary strike price could easily be believed to have NO effect on the stock price whatsoever. The stocks being sold that day are a fungible mix of old and new stock, gifted, purchased, optioned, company-buy-back, etc.

This activity should be reduced from the criminal system down to an accounting process issue. That's my opinion and I have justified it.

Rocketman

 

[GregA]

the sale of stocks from stock options at an arbitrary strike price could easily be believed to have NO effect on the stock price whatsoever.

I think you're largely agreeing with what I've said.

With one exception.

Apple's market cap is so high that a few million in stock options would have negligible effect on stock price. Just as (from my example) Apple spending a few million on consultants (or whatever) would have negligible effect on stock price.

(That's actually why I used a low priced example... just to make it more obvious. And naturally enough, spending lots on a consultant (however it's accounted for) doesn't necessarily change stock price if they are worth that much!)

 

[Rocketman]

I think you're largely agreeing with what I've said.

With one exception.

Apple's market cap is so high that a few million in stock options would have negligible effect on stock price. Just as (from my example) Apple spending a few million on consultants (or whatever) would have negligible effect on stock price.

(That's actually why I used a low priced example... just to make it more obvious. And naturally enough, spending lots on a consultant (however it's accounted for) doesn't necessarily change stock price if they are worth that much!)

Point.

It is also true a difference in stock options cost basis makes quite minimal difference in the financials and especially any aspect of the stock market.

Whenever something is changed or criminalized, I ask this simple question. Why? I never get a substantive answer. My substitute answer is regulator jurisdiction creep. It is always correct.

Rocketman

 

[IJ Reilly]

I detect some additional major misunderstanding about how stock options work. Whenever a public company issues more shares of stock, it represents a "dilution" of the equity held by every other stockholder. This happens even more notably in the case of shares granted outright then with options, for the reasons that the options may never be exercised if the share's market price drops below the strike price of the options, and/or if they are exercised, the holder of the options buys them from the company at the strike price. The market cap of the company and the number of share traded in any given day are irrelevant factors in either case. Further, the issuance of stock options has no direct impact on the market value of the stock. They may however increase the company's reported expenses if the strike price is below the market price, and thus the company's reported profits or losses.

There is no regulator's "jurisdiction creep" at work, either. Public companies must by law follow certain accepted accounting procedures.

 

[Rocketman]

I detect some additional major misunderstanding about how stock options work. Whenever a public company issues more shares of stock, it represents a "dilution" of the equity held by every other stockholder. This happens even more notably in the case of shares granted outright then with options, for the reasons that the options may never be exercised if the share's market price drops below the strike price of the options, and/or if they are exercised, the holder of the options buys them from the company at the strike price. The market cap of the company and the number of share traded in any given day are irrelevant factors in either case. Further, the issuance of stock options has no direct impact on the market value of the stock. They may however increase the company's reported expenses if the strike price is below the market price, and thus the company's reported profits or losses.

There is no regulator's "jurisdiction creep" at work, either. Public companies must by law follow certain accepted accounting procedures.

In this instance the market price of the stock rasised enough that any strike price would have been in the money. Therefore the only issue here, is not share count, or if they would be exerciseable, but the "cost basis" or strike price, which we all seem to agree has zero impact on the market for stocks.

The evidence of jurisdiction creep is that more things are illegal every year, and existing laws are enforced more harshly. There certainly is jurisdiction creep at the SEC and also at every other Federal Agency generally. It is undeniable. Although I would be amused to see someone try

Rocketman

 

[IJ Reilly]

In this instance the market price of the stock rasised enough that any strike price would have been in the money. Therefore the only issue here, is not share count, or if they would be exerciseable, but the "cost basis" or strike price, which we all seem to agree has zero impact on the market for stocks.

The evidence of jurisdiction creep is that more things are illegal every year, and existing laws are enforced more harshly. There certainly is jurisdiction creep at the SEC and also at every other Federal Agency generally. It is undeniable. Although I would be amused to see someone try

Rocketman

Okay, then I will amuse you. Sarbanes-Oxley (passed in 2002) increased corporate responsibility for disclosure and made corporate governors more responsible for their decisions. These new rules are a direct result of corporate accounting chicanery. But the issue at hand is not impacted by the new Sarbanes-Oxley rules because they occurred before 2002. The accounting issues in play have not changed.

 

[Rocketman]

Okay, then I will amuse you. Sarbanes-Oxley (passed in 2002) increased corporate responsibility for disclosure and made corporate governors more responsible for their decisions. These new rules are a direct result of corporate accounting chicanery. But the issue at hand is not impacted by the new Sarbanes-Oxley rules because they occurred before 2002. The accounting issues in play have not changed.

You DID amuse me.

I stated "The evidence of jurisdiction creep is that more things are illegal every year... Although I would be amused to see someone try."

You replied with EVIDENCE of my claim, "Sarbanes-Oxley (passed in 2002) increased corporate responsibility for disclosure and made corporate governors more responsible for their decisions."

As for what has changed, it is the way already common stock options dating is now being viewed and regulated differently. Sarbox is a LAW. SEC rules are REGULATIONS. In any case we can once again agree there is a drama happening, justified or not, over the strike prices of options grants and over the previously common practice of setting those prices "favorably" to the recipient.

Doing so improves the chances of being in the money, but does not guarantee it. It makes the value of the stock option slightly higher to the recipient, but little or no difference to the stock market or the firm, so long as the share count is not also adjusted.

Rocketman

 

[IJ Reilly]

You DID amuse me.

I stated "The evidence of jurisdiction creep is that more things are illegal every year... Although I would be amused to see someone try."

You replied with EVIDENCE of my claim, "Sarbanes-Oxley (passed in 2002) increased corporate responsibility for disclosure and made corporate governors more responsible for their decisions."

As for what has changed, it is the way already common stock options dating is now being viewed and regulated differently. Sarbox is a LAW. SEC rules are REGULATIONS. In any case we can once again agree there is a drama happening, justified or not, over the strike prices of options grants and over the previously common practice of setting those prices "favorably" to the recipient.

Doing so improves the chances of being in the money, but does not guarantee it. It makes the value of the stock option slightly higher to the recipient, but little or no difference to the stock market or the firm, so long as the share count is not also adjusted.

Rocketman

I aim to please.

I thought you were claiming that the pre-Sarbanes-Oxley regulations were being enforced more zealously. Or perhaps you were not. Either way, I don't see any evidence of that.