Options Troubles Aren't Over for Apple
Apple Inc., on a tear with its popular iPod players and Macintosh computers,
is expected to report strong quarterly results Wednesday but will face lingering
worries over the role its iconic CEO played in its stock options backdating
In the first action by federal authorities since Apple's options problems surfaced
a year ago, the Securities and Exchange Commission filed civil charges against
two former Apple officers Tuesday. But one of the accused -- former Chief Financial
Officer Fred Anderson -- pointed a finger at his former boss, Steve Jobs, raising
new accusations that experts say could land Jobs in some legal hot water if
The SEC said it did not plan to pursue any further action against Apple itself,
which cooperated with the government's probe, but it stopped short of saying
its investigation was closed. Commission officials declined to comment on whether
possible charges could still be filed against Jobs or other current officers.
The lack of clarity was compounded when Anderson cast blame at Jobs after agreeing
to settle the SEC charges over his alleged role in the backdating scandal. Anderson,
62, agreed to pay about $3.5 million in fines and penalties but did not acknowledge
Jerome Roth, an attorney for Anderson, issued a statement saying the former
CFO had warned Jobs about the implications of backdating one of the two grants
that were the basis of the SEC lawsuit. Roth said Anderson was reassured by
Jobs that the board of directors had given the necessary approvals, and that
Anderson concluded that the grant was being properly handled.
Roth's remarks contrasted Apple's earlier statements that Jobs was aware of
some favorable grant dates but that he neither benefited financially from them
nor "appreciated the accounting implications." Apple said in December
that its own internal probe cleared Jobs and current management of any misconduct.
Meanwhile, the U.S. attorney's office is still investigating. A spokeswoman
for the office declined to comment Tuesday on the status of the case.
Legal experts say the combination of Anderson's new accusations and the pending
investigations leave Jobs' culpability in question.
"That statement and the disposition of the SEC does leave Steve Jobs in
legal limbo," said Ralph Ferrara, a former general counsel for the SEC
who now works at the New York-based firm of LeBoeuf, Lamb, Greene & MacRae
LLP. "It leaves him not knowing if he'll be swept up in heaven with Apple
or cast into hell."
Apple spokesman Steve Dowling declined to comment on Anderson's claims but
pointed to how the SEC named only two former officers in its lawsuit Tuesday.
"It did not file (charges) against Apple or any current employees,"
Dowling said. He declined further comment.
After news of the SEC case and Anderson's statement were released Tuesday,
shares of Apple initially plunged more than 2 percent to bottom out at $91.30.
But the stock recovered to close at $93.24, down 27 cents, on the Nasdaq Stock
Market. The shares rose $1.36, or 1.5 percent, to $$94.60 in morning trading
Besides Anderson, the SEC filed civil charges against Apple's former general
counsel Nancy Heinen, 50. Her attorneys vowed to fight the charges.
The SEC accused Heinen of participating in fraudulent backdating and altering
company records to conceal the fraud. The charges were in connection with two
large options grants that caused the company to underreport its expenses by
nearly $40 million, the SEC said.
The first grant, in February 2001, consisted of 4.8 million options to Apple's
executive team. The second, in December 2001, was a grant of 7.5 million options
The SEC alleged Heinen modified documents to backdate the grant to Jobs, to
reflect that it had been approved during an October 2001 meeting that never
occurred. The SEC said the executive team's grant was also fraudulently accounted
for and that Anderson should have noticed Heinen's efforts to backdate it. The
CFO failed to take steps to ensure that Apple's financial statements were correct,
the SEC said.
Marc Fagel, an assistant regional director of the SEC in San Francisco, called
the charges "serious." The civil lawsuit was filed at the U.S. District
Court of Northern California in San Jose.
Heinen and Anderson "were entrusted to ensure that accurate financial
statements are shared with investors, and they failed to do that," Fagel
Fagel and Mike Fortunato, an SEC staff accountant who investigated the case,
disputed Heinen's claims of innocence and downplayed her attorney's statements
that it was an "unfair" case of Heinen being "singled out."
"Documents were altered," Fagel and Fortunato said, "and the
fact that the special (October 2001) meeting never happened -- it's hard to
accept that she's an innocent victim here."
Anderson and Heinen both left Apple last year as the backdating scandal was
Gene Munster, a financial analyst at Piper Jaffray, said Anderson's accusations
will fuel investors' worries over Jobs and his critical role in Apple's continued
"It gives the appearance that, 'I had a partner in crime and it was Steve
Jobs,'" Munster said.
But Munster thinks the SEC would have charged Jobs already if it supported
Anderson's claims. Munster predicted that Jobs would ultimately prevail and
be able to keep his job with only a small chance that he might face some monetary
Cupertino-based Apple is arguably the highest-profile company among dozens
facing stock options scrutiny by the SEC and federal prosecutors.
Backdating stock options is the practice of pegging a grant date to an earlier,
lower point in the company's stock price so the recipient could receive a larger
windfall in the future.
The practice, which was commonly used across Silicon Valley as a retainment
or recruiting tool, is not necessarily illegal in itself but could create legal
problems if it is not properly disclosed, leading potentially to inflated corporate
profits and underpayments in taxes.
After concluding a three-month internal probe, Apple said in December that
it would take an $84 million charge for improperly backdating 6,428 grants from
1997 to 2002.