Steve Jobs apologized last week while announcing the results of an internal investigation regarding Apple's backdating of stock options, in which options were granted on a preferentially low stock price date instead of the date upon which the grant was decidedShow full article

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Steve Jobs apologized last week while announcing the results of an internal investigation regarding Apple's backdating of stock options, in which options were granted on a preferentially low stock price date instead of the date upon which the grant was decided. Jobs said that no current management was involved in backdating options, which occurred on 15 dates between 1997 and 2002.

Separately, Apple's former chief financial officer, Fred Anderson, resigned from the Apple board, on which he had served after leaving his executive position in 2004. While Apple stated that two unnamed former officers of the company were involved in backdating stock, it made no connection between Anderson resigning and that statement. As CFO, Anderson would theoretically have been involved in accounting for options, but in other Silicon Valley firms that are being looked at for the same charges, officers other than the CFO and some lower-level executives handled or manipulated the mechanics to avoid general oversight.

Apple said that Jobs was not the beneficiary of any of these grants, but he was aware of some of them. However, the firm said that he was "unaware of the accounting implications," which is not an unreasonable statement. Jobs wouldn't be involved in the day-to-day work of issuing options and reconciling them on the books.

If the material Apple provides to the Securities and Exchange Commission (SEC) meets with its approval, Apple may be out of the woods with no real repercussions. The company will need to restate earnings, but because stock options are involved, that won't involve any change in its cash positions. It's possible Apple might be required to pay minor fines to the SEC, as well.

The two former executives could face separate actions, even if Apple faces none, and could be prosecuted on criminal offenses, barred from serving as officers in public companies, be fined, or experience none of the above. Without knowing their particular actions, there's no way to predict that outcome.

The backdating scandal involves stock options, which are the right but not the requirement to purchase stock at a given price, typically on or after a certain date, or during a date range. Companies issue options to employees and others to reward them if the company's stock increases above the strike price of the option, or the price at which it was granted.

Exercising an option means paying the option price, which can be zero, a few pennies a share, or much higher. With the stock options exercised, you own actual stock, but may face restrictions on selling that stock. (Some companies, like Microsoft, have bypassed options grants largely or entirely, and simply give employees stock, which may also have limitations on when it can be sold.)

When stock options are backdated, companies choose the date on which the stock price was at its lowest in a given quarter or a longer period, and then backdate the option grant to that date. One recent report revealed that a firm had issued options to an employee after his death, backdated to when he was still alive, in order to benefit his estate.

This practice is not illegal if fully disclosed. In the companies being looked at, the accounting didn't include the correct liability for these options, tax liabilities were overlooked, and other reporting was omitted. While little or no cash changes hands between a company and an option grantee, issuing options and subsequently having them exercised changes the amount of stock a company possesses, and thus - among other factors - changes its capability to raise cash or issue options in the future and dilutes the stock in the general marketplace.

Dozens of firms were caught up in the revelation of this practice, which typically occurred in the late 1990s up to 2002, during the dot-com era when stock options went from a typically long-term proposition for gain to quick, meteoric run-ups. The Sarbanes-Oxley Act of 2002 changed the landscape because it requires stock options to be reported within two days of being issued. Previously, companies reported months or even more than a year after issuing options, allowing time to rejigger the dates. Reports show that many reports are still being filed late, however.

Stock option backdating is a big deal. Entire management teams at some firms have been forced to resign. Indictments have been flying. Restatements of income on the order of billions have already happened. Back taxes will often be owed, as well. So far, the SEC is investigating on the order of 80 companies. Some have made a clean breast of their practices and issued reports; others have resisted and may face full-scale SEC lawsuits as a result.

Is this a black eye for Apple? Absolutely. Apple's accounting folks have up to this point had clean hands and generally received good marks for how they report financial results. Unless further investigation should reveal more than this first report, however, Apple has limited the risk of further problems, and Steve Jobs will remain in his exalted role.

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Steve Jobs did not benefit from the discontinued practice of stock-option backdating at Apple, a company board committee led by board member and former Vice President Al Gore reported at the end of DecemberShow full article

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Steve Jobs did not benefit from the discontinued practice of stock-option backdating at Apple, a company board committee led by board member and former Vice President Al Gore reported at the end of December. While Jobs approved back-dated options for others, the committee said he did not "appreciate the accounting implications."

Apple restated its earnings as part of a filing with the Securities and Exchange Commission (SEC), dropping their previously stated figures over a period that stretches back as far as 1998 by $105 million before tax, or $84 million after tax.

We discussed Apple's involvement with stock-option backdating a few months ago (see "Apple Reports on Options Backdating Problems," 2006-10-09), noting that while the practice of choosing the optimum date on which to set a stock option price is legal, backdated options must be reported and correctly accounted for.

The backdating options probe did not look into allegations raised in a lawsuit filed against Apple late in 2006 that allege spring-loaded options. In that case, advance knowledge of a positive event are used as a catalyst to issue options before the event occurs. According to the Los Angeles Times, the lawsuit claims that one million spring-loaded options were awarded just prior to the 1997 investment of $150 million by Microsoft shortly after Steve Jobs return to Apple. The options gained $7.7 million in value within one day of being issued due to news of the Microsoft investment.

The practice of backdating options does not materially affect companies, because the expense associated with option grants isn't an outlay of cash. Thus, the accounting issues have more to do with the overall viability and perceived ethics of a company, and the perception of its future potential earnings and profit - really two different kinds of net income. Backdating sucks money out of the stock market, not a company's own coffers, by gaming the system, essentially using retrospective knowledge of the stock price over time as a kind of time machine. It's not fair to stockholders or stock traders.

Apple has offered a small degree of transparency about the problem, disclosing a few early details before this filing. Jobs even apologized for engaging in the behavior. Apple, like many companies, revised its practices in 2003 when a new law went into effect governing the reporting of option grants. Grants must now be reported within two days, minimizing even legal backdating, but some financial academics have said they have found backdating problems in some firms - not Apple - dating from 2003 and later.

A summary of the findings of the board's special committee are found in Apple's 10K filing, their report to the SEC for the fiscal year ending 30-Sep-06 that was delayed until this internal investigation was completed. Over 42,000 option grants were made in the period in question - between October 1996 and January 2003 - and about 6,500 had incorrect dates.

A small number of grants had a large effect, however, with 660 special grants representing $48 million of the restatement, and one set of options given to Jobs - and later canceled - causing $20 million of the restatement.

Jobs's grants were originally issued in 2000 and 2001, covering 10 million and 7.5 million option shares, respectively. The second grant was backdated from 18-Dec-01 (stock at $21.01, adjusted for later splits) to 19-Oct-01 ($18.30) or a difference of about $20 million. The board later canceled the options and gave Jobs 5 million restricted shares in March 2003 (now split to 10 million shares). He thus never saw any financial advantage from the option grants. (Jobs had Apple sell nearly half the stock in March 2006 to pay a $300 million tax bill when the stock vested that month; he retained about 5.5 million shares now worth a bit under $500 million.)

On page 85 of the 10K filing, Apple states bluntly that "the investigation had raised serious concerns regarding the actions of two former officers in connection with the accounting, recording, and reporting of stock option grants." This might be read as referring to former financial head Fred Anderson, who resigned from the board in October 2006, and general counsel Nancy Heinen, who left in May 2006 without a reported reason.

Anderson's attorney told the Wall Street Journal that Anderson wasn't involved in "any day-to-day role in the granting, reporting, and accounting of stock options." An attorney for Heinen told the New York Times, "Nancy Heinen has a well-earned reputation over 20 years for honesty and integrity, and any rumors to the contrary are without foundation."

There's still the potential for the SEC to find other fault via its own investigation, although the bona fides of having Al Gore lead a committee that reports it spent nearly 27,000 person-hours poring through a million documents and interviewing 40 employees should forestall any surprises for the current management. The SEC may require penalties from Apple, and could decide to pursue legal action against Jobs or other current or former management.

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The U.S. Securities and Exchange Commission (SEC) has accused two former Apple executives in two instances of illegal stock option backdating that Apple had previously disclosed after an internal investigation (see "Apple Releases Stock Option Backdating Report," 2007-01-08)Show full article

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The U.S. Securities and Exchange Commission (SEC) has accused two former Apple executives in two instances of illegal stock option backdating that Apple had previously disclosed after an internal investigation (see "Apple Releases Stock Option Backdating Report," 2007-01-08). Nancy Heinen, former general counsel of the company, was charged with improper actions in two sets of options grants and in altering company records to conceal what the SEC alleges was fraud. The full complaint is available as a PDF.

Former chief financial officer Fred Anderson was separately charged with failure to ensure that Apple's financial statements were correct through a lack of observation in the first of those two sets of options grants. In that first set of grants, Heinen, Anderson, and four other executives benefited. In the second, only Steve Jobs stood to gain.

Anderson immediately settled the charges without "admitting or denying the allegations," an approach the SEC allows when the agency perceives public interests are served by closing the affair instead of proving guilt or losing a case. Anderson will give up nearly $3 million in stock option gains and nearly $700,000 in interest and penalties.

Stock options convey the privilege, but not requirement, to purchase stock at a given price. Money is made by exercising the options (purchasing them) and then selling when the options' price is below the current market price of the stock. Options often come with a restriction on how soon the underlying stock may be purchased.

In stock-option backdating, the date on which the option is granted does not reflect an actual board meeting or other event at which an option is granted. Rather, the option is set to a preferentially cheaper price by choosing a date on which the stock is cheaper than on the substituted option grant date, putting options immediately "in the money."

Backdating is legal if acknowledged with proper record keeping, including financial charges that result from what is essentially a company gift of additional money captured from the stock market. The SEC stated that nearly $40 million in expense was improperly excluded from Apple's regulatory filings.

Apple earlier found several instances of backdating, but cleared current management, including CEO Steve Jobs. The SEC said Apple cooperated in the investigation, and it has no plans to charge the company. Other charges against individuals could still come, including Jobs and other members of current management.

Following the SEC's press release, Anderson's attorney released a statement in which the attorney said Anderson informed Jobs about potential accounting charges required for one of two grants to Jobs that were later canceled and replaced with grants of stock that required no exercise. Anderson's attorney said, in brief, that statements made to Anderson turned out to be false, although the attorney doesn't state it so bluntly. (So much for "neither admitted nor denied" the charges.)

Apple's board of directors, excluding chairman Jobs, released a statement the day after Anderson's, expressing full confidence in the company's own investigation and in Jobs.

While Anderson settled the charges, it's unclear precisely why, and the release doesn't explain his decision. It's easy to speculate that in Anderson's current role - alongside U2's Bono! - as a founder and director of investment firm Elevation Partners, protracted litigation would have been expensive and a distraction from his other duties. In the settlement, Anderson admitted no guilt, and can continue to serve as an officer and director of public firms. He sits on the board of eBay.

The Associated Press says that Heinen will contest the charges.

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Dear diary: I had breakfast with Fake Steve Jobs! He showed me the next-generation iPod (hint: it requires minor surgery to use), gave me a shiny new penny, and then wiped my memory using his reality distortion field. All I recall is eating a bagel with a Boston-based Forbes reporter named Dan Lyons.Show full article

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Fake Steve Jobs was in Seattle to make an author appearance at Microsoft yesterday, and I sat down to breakfast with him to discuss his book, his real identity, and how much he likes steel-cut oatmeal. FSJ, as we've all known since August, is journalist Dan Lyons, a Forbes magazine editor who has a gift for parodying the self-important, egotistical, every-day-is-a-revolution tone of Silicon Valley executives. Fake Steve Jobs has a passing resemblance to Real Steve Jobs, but the tone is completely invented, and almost always funny. Parts of our conversation appear at The Seattle Times. (Thanks to the iPhone for this blurry photo, but our respective breakfasts came out clearer.)

While Andy Ihnatko was widely suspected of being FSJ, he denied it in a rather funny column that appeared at Macworld.com on July 24th. Lyons told me that he and Andy were in correspondence before the rest of the world knew Lyons was FSJ's creator, and he encouraged Andy to stretch it out a bit!

Lyons is a charming fellow in his 40s, married with 2-year-old twins back home in Boston, and wrestles family life and a full-time job to tap out his daily musings. He had told some of his editors at Forbes about FSJ before it broke when the media wave started to sweep up and over him to avoid duping his employers. When the Times broke the story about his identity, Forbes offered to sponsor the site, which gets a million page views a month. Lyons said traffic peaked in August, when he had 500,000 page views on the day the Times story ran.

Lyons has written a book loosely based on the blog called oPtion$, which purports to be a first-person narrative of FSJ as he goes from golden boy to exile due to an options backdating problem that has some resemblance to Apple's travails and back to being in charge - before he embarks on an unexpected and strange new journey. FSJ isn't a three-dimensional character, but he has more inner life than the blog, which focuses on episodic zingers.

I liked oPtion$ despite the fact that it was a little more serious and a little stranger than the FSJ blog. There are a number of laugh-out-loud moments throughout which mostly center on FSJ's world-beating self-esteem, an encounter with Yoko Ono, and an appearance by Hillary and Bill Clinton. Fake Yoko Ono is holding back The Beatles songs from appearing on iTunes; FSJ threatens in a Zen-like manner to buy The Beatles catalog from Sony and re-record it with Paul McCartney. Absolutely over the top, impossible, but within the realm of the possible in a world where Michael Jackson once owned the music's rights.

Lyons frequently takes the piss out of his character, whom he has obvious affection for, even though egotism and the pure power of money sort of triumph at the end. For instance, we get this passage when FSJ recounts part of his trip to India at 19, a journey that RSJ took as well. He's in a private meeting with his guru, Krishna Neeb Baba, who washes his hair and shaves FSJ's head. The guru asks FSJ, "Do you know why I did this?" FSJ replies, "I'm the chosen one, right? I've always known it. I'm the reincarnation of Buddha, right?" The guru says, "Not quite. You have lice. That's why I shaved your head. You can't go home to America with lice."

Baba then reveals that he's a total fraud, which FSJ had already sussed out, and sends him back to the States with this prescient admonition: "Someone is going to figure out a way to create material things and to imbue them with a sense of religious significance. I don't know how this will happen. But it will happen, because it needs to happen."

It's a rather charming book, shorter on the craziness that makes the blog a form of super-gonzo journalism, like the Onion turned up to high heat. It's a quick and good read.

Oh, and this movie studio executive totally kills this hobo on page 215. Dude, he just reaches out - and, snap!

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The Justice Department reportedly ends its criminal investigation into Apple's stock backdating affair. A civil action by the SEC remains against a former executive.Show full article

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The Wall Street Journal reports that the Justice Department has ended its criminal investigation into whether Apple executives broke the law when they backdated some options without proper accounting and disclosure. Neither Apple nor the Justice Department has made a statement confirming that the investigation is over, but lawyers representing some of those under a cloud told the Journal that they were informed the probe is finished. A civil action by the SEC and private lawsuits are still underway, however.

The SEC looked into Apple's revelation that they had issued stock options to a variety of employees, including Steve Jobs and other executives, that tied the options to a date prior to that on which the options were granted, so called backdating. Stock options are the right, but not the obligation, to purchase stock at a specific price no matter the current price.

By backdating options, a company can assure a windfall to the recipients. Companies may backdate options in many circumstances, but must account for them as a higher expense than merely granting current-dated options, as there's a negative effect on the equity of a firm's shareholders. An academic researcher and The Wall Street Journal blew the lid off this widespread and long-running practice; executives at other firms were indicted, sued by shareholders, fired, or all three. (For more background on backdating, see "Apple Reports on Options Backdating Problems," 2006-10-06.)

The investigation has lasted nearly two years. A parallel SEC examination led to civil charges filed against two former Apple executives. Former chief financial officer Fred Anderson, who did not admit to wrongdoing or any of the charges, settled them almost immediately, giving up $3.7 million in gains, interest, and penalties (see "Former Apple Employees Charged in Stock Option Backdating," 2007-04-30). Anderson, who had left his job as CFO at Apple on good terms in 2004, resigned from Apple's board the day it released its first report on backdating in October 2006.

Nancy Heinen, Apple's former general counsel, was also charged and still faces civil action by the SEC, according to her lawyer as quoted in the Journal. The charges against Anderson and Heinen centered on options granted to Steve Jobs, which were canceled before they were exercised, and replaced with 10 million properly restricted stock grants that were properly accounted for. (Jobs sold about $300 million of those shares when the restrictions ended in 2006 to pay the tax due. He still holds 5.5 million shares worth nearly $1 billion.)

Apple released its own report on the matter back in January 2007 from an internal committee headed by former Vice President Al Gore, a board member (see "Apple Releases Stock Option Backdating Report," 2007-01-08). That report will likely stand as the public accounting unless Heinen's case goes to trial and additional facts are revealed.

The apparent end of this Justice Department probe also means an end to the speculation that Jobs would face a trial or be forced to resign as part of a settlement. While in recent months this issue seemed to be in abeyance, this probably relaxes the stock market and analysts who speculated on an abrupt change in who would be running Apple.

The backdating kerfuffle in part led to Daniel Lyons's blog, The Secret Diary of Steve Jobs, written by Lyons's nom-de-blog Fake Steve Jobs. Lyons wrote a book called oPtion$ that fictionalized and satirized the minor scandal (see "My Real Breakfast with Fake Steve Jobs," 2007-10-24).

Lyons recently announced on his Fake Steve blog that he was discontinuing writing in a faux Jobs style. Lyons was recently hired away from his current employer, Forbes, to take over Steven Levy's technology beat at Newsweek. (Levy had previously left Newsweek for Wired.)

The timing was suspicious - how did Lyons know that his story arc was at an end? Perhaps...an investigation will be launched.

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Nancy Heinen, once Apple's general counsel, will pay $2.2 million to settle charges raised over Apple's handling of backdated stock options. Show full article

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The former general counsel at Apple, Nancy Heinen, agreed to settle civil charges with the Securities and Exchange Commission regarding her involvement in planning and issuing backdated stock options while at the company. She will pay $2.2 million, but neither admit nor deny wrongdoing.

Heinen, along with former chief financial officer Fred Anderson, were sued by the SEC in April 2007 for their involvement with how certain grants of stock options were handled. The agency said Heinen created minutes for a board meeting that never occurred after the date on which it was alleged to have happened, as well as moved back the dates on which options were granted without properly recording or acknowledging either of those changes. Anderson settled immediately, also without admitting or denying any incorrect behavior.

In December 2006, Apple released a report that essentially agreed that there were irregularities in stock option grants, raised "serious concerns regarding the actions of two former officers," and revised its past years' earning statements to include the hidden cost of the backdated grants. The Justice Department ended its criminal investigation into Apple's backdating in July 2008.

You can read the long, involved history in our series, "Apple's Trouble with Backdated Stock Options."

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A preliminary settlement has been reached over lawsuits accusing Apple executives of various inappropriate acts related to the backdating of stock options. This may be the end, at last, of this ugly chapter in the company's financial history.Show full article

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Reuters reports that Apple executives have agreed to settle charges brought against them by a variety of shareholders in various lawsuits relating to the company issuing backdated options. These options had their prices set on a date prior to the one on which they were issued, which typically provides a built-in financial advantage - the options have a price below the market price on their actual issue date - and, while not illegal per se, must be disclosed and properly accounted for. (For the full account of how Apple got itself into all this trouble and has apparently sorted it out, see our series, "Apple's Troubles with Backdated Stock Options.")

A number of current and former Apple executives were named in the lawsuits, including Steve Jobs, former chief financial officer Fred Anderson, and former general counsel Nancy Heinen. Anderson and Heinen were singled out in an internal investigation Apple conducted into its own behavior - although they weren't fingered by name - and both Anderson and Heinen settled separate actions with the SEC in which they neither admitted nor denied culpability. The company was never specifically charged with any civil or criminal actions.

Reuters says all the targets of these various lawsuits have agreed to a settlement, to which a judge has given preliminary approval, in which $14 million will be paid to Apple, which in turn will pay $9 million to plaintiffs to cover legal expenses. The settlement will be paid by Apple's insurance provider.

The suits were filed on behalf of Apple by shareholders, and they aren't sharing in the proceeds - which means Apple gets a $5 million rebate of sorts against their insurance premiums, and executives pay nothing. Plaintiffs can't legally get a kickback on legal fees in these sorts of cases; the Justice Department successfully prosecuted several attorneys over the last few years involved in such schemes.

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