April 25, 2007
Steve Jobs and Securities Fraud
Posted by Gordon Smith

Steve Jobs has been the Teflon man with regard to the backdating of his Apple options, but that may change as of today. When revelations of backdating at Apple first surfaced, the company issued a statement claiming that Jobs didn't "appreciate the accounting implications" of backdating. Yesterday, after settling with the SEC, Apple's former chief financial officer, Fred Anderson, issued a statement, which may end up blowing a sizeable hole in Jobs' defense.

The gist of the problem is the Apple options in question were granted to senior Apple executives (apparently not including Jobs) in early February 2001, when Apple's shares were trading at $21, but the company used its closing stock price of $16.81 on Jan. 17 as the exercise price for the options. The general counsel of the company allegedly prepared documents showing board approval on January 17, and Apple did not record extra compensation from the options grant, causing Apple to understate its net loss by 10.8%.

According to Fred Anderson's attorney:

-- Fred was told by Steve Jobs in late January 2001 that Mr. Jobs had the agreement of the Board of Directors for the Executive Team grant on January 2, 2001. At the time Mr. Jobs provided Fred this assurance, Fred cautioned Mr. Jobs that the Executive Team grant would have to be priced based on the date of the actual Board agreement or there could be an accounting charge. He further advised Mr. Jobs that the Board would have to confirm its prior approval in a legally satisfactory method. He was told by Mr. Jobs that the Board had given its prior approval and the Board would verify it. Fred relied on these statements by Mr. Jobs and from them concluded the grant was being properly handled.

-- Fred understood that, under Apple's stock option plan and accounting rules at the time, a grant date could be moved to a later date than the date of the actual grant decision and that there would be no compensation expense as long as the stock price on the new date was higher than the price on the original date. Apple's 1998 Executive Officer Stock Option Plan provided in Section 16 that "The date of grant of an Option...shall be, for all purposes, the date on which the Administrator (in this case the Board) makes the determination granting such Option...or such later date as is determined by the Administrator ". Mr. Anderson understood that the date of grant was to be moved forward pursuant to this provision from January 2 to January 17 to avoid any appearance of impropriety that might arise from a grant awarded just prior to the stock price rise that resulted from the 2001 MacWorld exhibition and Mr. Job's keynote speech at the exhibition on January 9. He further understood that the January 17 date was selected by Mr. Jobs and Ms. Nancy Heinen, the former General Counsel, and that the stock price on January 17 was higher than the price on January 2.

-- Finally, Mr. Anderson understood that the Board of Directors, which consisted of sophisticated corporate executives of national stature, including the former Chief Financial Officer of IBM, verified the January 17 date by signing in early February 2001 a Unanimous Written Consent (UWC) with an effective date of January 17. It now appears the Board may not have given the necessary prior approval to the grants, contrary to what Mr. Anderson understood from Mr. Jobs and from the Board's signing of the UWC with an effective date of January 17.

Hmm. This has a ways to go, but Jobs could be in serious trouble. The key is whether Jobs acted with an intent to deceive Apple's investors. If Jobs knew the backdating would lead to a distortion of the company's financial statments, that looks like fraud.

UPDATE: Jeff Lipshaw dug into the SEC's complaint against Anderson and Apple General Counsel Nancy Heinen, and he concludes: "the use of the [unanimous written consent] in context with the auditors as a means of fudging the date of a grant, if as alleged, as well as the creation of minutes to a meeting that didn't occur, would bother the hell out of me as a lawyer and the certifying secretary."

UPDATE2: Statement from Apple Board Board Members Bill Campbell, Millard Drexler, Albert Gore Jr., Arthur D. Levinson, Eric Schmidt and Jerry York:

We are not going to enter into a public debate with Fred Anderson or his lawyer. Steve Jobs cooperated fully with Apple’s independent investigation and with the government’s investigation of stock option grants at Apple. The SEC investigated the matter thoroughly and its complaint speaks for itself, in terms of what it says, what it does not say, who it charges, and who it does not charge. We have complete confidence in the conclusions of Apple’s independent investigation, and in Steve’s integrity and his ability to lead Apple.

UPDATE3: Larry Ribstein has been blogging Apple more frequently than anyone. He suggests that Steve Jobs may be the protagonist in a noir plot:

All of this reminds me of the familiar noir plot in which powerful forces close in from every side on the protagonist. In my favorite version, Night and the City, Harry Fabian did his own version of backdating in the wrestling game, and ticked off some real ornery folks. He's finally chased down in a riverfront hovel where the underworld closes in.

In this case, Jobs' "non-appreciation" defense is likely to get more tenuous if people like Heinen, and possibly Anderson, start talking.

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