It appears that the options scandal is not quite over for Steve Jobs.
From The WSJ:
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Ex-Finance Chief Says Jobs Misled Him on Options
Apple CEO May Face
New Questions on Role
In Backdating Grants
By NICK WINGFIELD and STEVE STECKLOW
April 25, 2007
Apple Inc.'s former chief financial officer, in a striking public statement, asserted that Chief Executive Steve Jobs misled him about board actions on stock-options awards, and that he told Mr. Jobs the company might have to take a charge against earnings if it backdated stock-options grants -- a charge it didn't take.
The allegations by Fred Anderson, now a partner in a Silicon Valley private-equity firm, could complicate efforts by Mr. Jobs to stay above the options-backdating fray, which has swept up Apple and more than 140 other companies in federal investigations and forced about 80 corporate executives out of their jobs.
An option gives its holder the right to buy a stock at a fixed price, typically translating into profit only when the stock rises. Backdating an option -- which provides more profit potential to the recipient -- violates securities law when shareholders are told, as they were at Apple, that grants were made at the market price on the date of the grant.
Apple has acknowledged backdating options grants, and said Mr. Jobs helped select dates for some of the backdated grants. But the company has steadfastly contended that he isn't guilty of any wrongdoing, in part because he didn't "appreciate the accounting implications" of backdating options. The Securities and Exchange Commission yesterday said it was taking no action against Apple itself because of its "extraordinary cooperation" in the agency's investigation.
In deciding whether to bring criminal or civil charges over possible securities-law violations, prosecutors often focus on the question of intent -- which includes whether potential defendants knew their actions were wrong. In other options cases, the government has attempted to show intent by citing evidence that executives knew earnings charges should be taken, and took action to avoid that.
Later Restated Earnings
Mr. Anderson, speaking through his attorney after settling SEC charges related to his own alleged role in backdating at Apple, contradicted the defense of Mr. Jobs's role. The former Apple executive said he warned Mr. Jobs in late January 2001 -- while Apple was in the process of backdating a grant -- that the company might have to take an accounting charge if Apple didn't price stock options to its executive team based on the date the board approved the grant. The Cupertino, Calif., computer maker didn't take a charge at the time, but later restated earnings to account for backdating.
The attorney's statement also alleged that Mr. Jobs had misled Mr. Anderson by telling him that Apple's board "had given its prior approval" to the grant when, in fact, it hadn't. Based on this assurance, Mr. Anderson believed that the options had been granted on a day on which Apple's share price was higher than the day the board had approved them, meaning that no charge against earnings was necessary, the statement said. "Fred relied on these statements by Mr. Jobs and from them concluded the grant was being properly handled," the statement said.
Mr. Anderson's allegations about his former boss came as the SEC, as expected, also filed civil charges yesterday in federal court in San Jose, Calif., against former Apple general counsel Nancy Heinen, for her alleged role in backdating options and falsifying company records to conceal the fraud. Ms. Heinen's attorneys denied she backdated options or committed fraud and vowed to fight the charges.
Mr. Jobs referred a request for comment to Katie Cotton, an Apple spokeswoman, who said the company had no comment on the statement by Mr. Anderson's attorney.
Apple has previously said Mr. Jobs recommended "favorable" dates for some options awards, but the SEC's 20-page complaint provides new details. On Jan. 30, 2001, it says, Ms. Heinen provided Mr. Jobs with a list of the closing share prices of Apple's stock for that month and suggested the company use an earlier date to grant options to six senior executives, including herself and Mr. Anderson. Two days later, the complaint alleges, she told Mr. Anderson "that Jobs had agreed to use Apple's closing price on Jan. 17 for the Executive Team grant."
Yesterday's statement from Mr. Anderson's camp was especially surprising because his settlement with the SEC over his role in backdating options at Apple appeared to put a painful chapter in his career behind him. His agreement with the SEC allows Mr. Anderson to continue serving as a director and officer of public companies. In addition to being a partner at private-equity firm Elevation Partners, Mr. Anderson currently serves on the board of eBay Inc. and heads its audit committee; eBay CEO Meg Whitman said in an email yesterday that he "absolutely" would remain there.
Mr. Anderson agreed to pay about $3.5 million in disgorgement of options profits, plus a $150,000 civil penalty, without admitting or denying the SEC's civil-fraud allegations.
SEC officials appeared caught off guard by the statement by Mr. Anderson's attorney. Marc Fagel, head of enforcement for the SEC's San Francisco office, declined to comment on the allegations concerning Mr. Jobs, but said of Mr. Anderson, "No matter what he may have discussed with Steve Jobs, and we're not commenting on whether or not that actually happened," Mr. Anderson "had documents in front of him showing that these options were granted with hindsight. At that point, he [the CFO] should have taken steps to assure that the financial statements were accurate and he failed to do so."
It remains unclear whether Mr. Anderson's new allegations will prompt the SEC or the San Francisco office of the Justice Department, which is conducting a separate investigation of Apple, to take any action against the Apple CEO, who has played a crucial role in his company's success. Although Apple shares declined 27 cents yesterday to $93.24, investors nonetheless appeared to take the SEC actions as a sign that Mr. Jobs isn't in any legal jeopardy.
Accounting Implications
Mr. Anderson's attorney, Jerome Roth, declined to address whether his client is prepared or able to provide evidence against Mr. Jobs to the Justice Department, which also is investigating Apple's backdated options. Asked about Apple's previous statements that Mr. Jobs wasn't aware of the accounting implications of backdated stock options, Mr. Roth said, "We're definitely not commenting on Steve Jobs's state of mind, what he did or didn't know, or what he appreciated or didn't appreciate. We're simply indicating our understanding of the factual circumstances related to the grant."
Mr. Roth said Mr. Anderson made the statements about Mr. Jobs "because it was important that people understand our view of what occurred here and that people not speculate that Fred did things he didn't in fact do."
How aggressively the U.S. Attorney's office in San Francisco will pursue its probe into Apple remains unknown, in part because the office is in the midst of some turmoil. U.S. Attorney Kevin Ryan recently was dismissed, another prosecutor working on the Apple case has left and another is on leave, according to a person familiar with the matter. A spokeswoman at the San Francisco office declined to comment.
The SEC complaint against Mr. Anderson and Ms. Heinen focuses on two instances of options backdating at Apple in 2001 -- one grant to six senior executives and another to Mr. Jobs -- that resulted in significant boosts to the company's bottom line and improperly enriched executives. In the first case, Apple in early February 2001 finalized a grant of 4.8 million shares to senior executives, including Ms. Heinen and Mr. Anderson, when Apple shares were trading at $21, prior to a subsequent stock split.
The SEC complaint says Ms. Heinen "caused" Apple to backdate the grant to the Apple executive team to Jan. 17, 2001, when Apple's share price was substantially lower at $16.81. Further, the complaint says, "Heinen also directed her staff to prepare documents that falsely indicated Apple's Board had approved the Executive Team grant on January 17." Mr. Anderson was aware of the manner in which the grant was selected and "its impact on Apple's reported compensation expense should have been clear to him," the complaint says.
The upshot of the date change: For fiscal 2001, Apple failed to record extra compensation from the options grant, which caused Apple to understate its net loss by 10.8%, according to the SEC. As recipients of options from that grant, Ms. Heinen and Mr. Anderson personally "reaped improper benefits of approximately $1.6 million and $3 million, respectively," the complaint says.
News of Apple's former CFO pointing the finger at CEO Steve Jobs in the options-backdating probe comes as "a big surprise," says Piper Jaffray's Gene Munster.
Ms. Heinen also played a central role in a grant of 7.5 million shares to Mr. Jobs later that same year, the SEC says. The complaint says she backdated the grant to Mr. Jobs to Oct. 19, 2001, when Apple's shares closed at $18.30, though terms of the grant weren't finalized until Dec. 18, when Apple shares were at $21.01. That resulted in Apple improperly failing to record $20.3 million in compensation expense related to the grant to Mr. Jobs, a move that caused Apple to overstate its net income by 9.2% for fiscal 2002.
In response to the SEC allegations, one of Ms. Heinen's attorneys, Miles Ehrlich, said, "To suggest that Ms. Heinen engaged in fraud is to misunderstand the facts of what happened. Nancy did not backdate stock options, and she didn't deceive anyone either inside or outside the company. Every action Nancy took was fully understood and authorized by Apple's board of directors, was consistent with the interests of the shareholders -- and consistent with the rules as she reasonably understood them."
The SEC complaint provides vivid details of how the backdating process allegedly worked at Apple and how Ms. Heinen, who was also Apple's corporate secretary, allegedly falsified documents to enable it. The problems with the grant to Mr. Jobs began after the board agreed on Aug. 29, 2001, to award him 7.5 million options, and Mr. Jobs became dissatisfied with the schedule that determined when he could cash the options in.
Compensation Committee
As the board's compensation committee negotiated with the CEO over the next several months, Ms. Heinen became "increasingly concerned about the delay" because Apple had missed a November deadline for reporting the specifics of his grant to the SEC, the complaint says. The company also hadn't disclosed the grant to its auditor, KPMG.
The complaint says Ms. Heinen, worried that the original August grant date would no longer "withstand scrutiny," suggested that Apple's compensation committee pick a new grant date for the award in October or November. After finalizing the terms of the grant to Mr. Jobs on Dec. 18, when Apple shares close at $21.01, the committee agreed to backdate the options to Oct. 19, when the stock was at $18.30, according to the SEC.
The complaint accuses Ms. Heinen of directing her staff to prepare fictitious minutes for a "special meeting" of Apple's board on Oct. 19 that never occurred, and later affixing Apple's corporate seal to the phony documents, the complaint says. Ms. Heinen also allegedly caused meeting minutes from actual board and compensation-committee meetings in August and October of 2001 to be altered to conceal the backdating.
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Link to story here: tinyurl.com
For those who are interested, the article includes a link to the SEC's complaint.
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