The backdating zealots' Apple problem

Although I've signed off for the year, I’m not going to let this WSJ story sneak in under the cork-popping.

It seems that Apple has restated its earnings, acknowledging 6,428 improperly dated options, granted on 42 different dates from 1997-2002, and recognized an $84 million charge. The WSJ says the “restatement represents an acknowledgement that grants were backdated on a large scale.”

Apple also found that Steve Jobs had "recommended" favorable option dates.  According to Apple, one grant of 7.5 million options to Jobs on October 19, 2001 supposedly occurred at a special board meeting that didn’t actually exist. Apple took a $20 million charge, before taxes, related to that grant.  Apple’s not recouping restricted shares that Jobs got in exchange for those options prior to the end of the three-year options vesting period. (Sounds a little like a reload of a backdate.)

Apple’s internal investigators, including directors Al Gore and Jerome York, ignored the funny odor and expressed “complete confidence in Steve Jobs and the senior management team.”

But NYU’s David Yermack says: “They have pretty much admitted that [Jobs] was directly involved in a fraud. If he had directly participated in altering depreciation schedules, or booking revenue that wasn’t yet earned, would they have full confidence in him?”

Terrific question Professor Yermack. Suppose, for example, we’re talking about Bernie Ebbers or Jeff Skilling?  At least, with Al Gore on the case, we won’t be hearing, as we did with Enron, about Steve Jobs’ Republican friends.

It looks like former GC Nancy Heinen, who may have participated in the improper documentation, might take the fall. Meanwhile, Gregory Reyes of Brocade, who did not receive any backdated options, is facing criminal charges. Apple’s story seems to be that Jobs, possibly unlike Reyes and Heinen, didn’t “appreciate the accounting implications.”

Just to summarize the emerging blackletter law:  It's ok to commit “fraud” (which is what we are repeatedly told backdating is) if (1) you are a media darling who produces fancy products that everybody loves; (2) you can get Al Gore to sign off (I guess this particular truth isn't too inconvenient); and (3) you can get somebody else in your company to do the dirty work.

There's also an anecdote here about actual effect of backdating on companies: Apple’s stock sank 5% after it looked like Job's job might be on the line, but then rose the same amount when the board committee made it clear he wasn’t going to be fired. Does this mean that the market doesn’t care about the fraud, but just about the governance turmoil the media frenzy wreaks on companies?

Seems to me that this story gives the backdating zealots some splainin to do, as Desi would say.

Now, I will sign off for the year. Watch for some changes next year!

Comments

[Robert Schwartz]

I think one problem is that many, if not most, executives have no clear idea of the formalism behind stock options. I recall having many conversations about technical issues like grant date pricing. I don't think that any of them (and they were not stupid, they just had better things to worry about) ever quite got it. It's OK. If you can screw your brain into the places required to be a securities lawyer, you are probably no longer fit to run a corporation anyway.

[Sam E. Antar (former Crazy Eddie CFO & ex-felon)]

The pursuit of criminal conduct in America should not be affected by the ideology and prejudices of those seeking justice and the persons being pursued. The pursuit of Justice must be blind.

Steve Jobs and individuals at Apple Computer must face the same amount of scrutiny as those involved in Enron and other major corporate frauds.

The disclosures in Apple's report are very troubling and require an appropriate investigation by the SEC and US Attorney for possible criminal conduct.

Steve Jobs should welcome such an inquiry if he is in fact not guilty of any misconduct. Mr. Jobs himself must also provide the public with a forthright, reasonable, and transparent explanation without any spin if he is to have any integrity.

Respectfully,
Sam E. Antar (former Crazy Eddie CFO & ex-felon)

PS: A happy New Year to all.

[save_the_rustbelt]

So if the members of the Apple board can ignore ethics to cover for Jobs, then any criminal violations do not exist.

Hey, I get it now.

The rich and powerful do not have to obey the law.

Now I understand the legal system.

[Christian]

Maybe -- just maybe -- there is a factual basis for the conclusions of the Apple board of directors. After all, they're presumably reviewed the facts. None of us have. I would guess that, in an area like this, culpability is going to turn on very specific and particular facts. White collar crimes are not always outright fraud or theft and are certainly unlike murder; they often turn on technicalities and what separates a crime from lawful conduct can often be the subtlest of things.

People should be treated equally under the law; in addition to being a requirement of basic fairness, such even-handedness is required if popular support for legal institutions is to be maintained.

But that doesn't mean each and every case needs to come out the same way. First, factual differences can be important. Second, we learn things from prosecuting early cases that affect the way we feel about later cases. For example, after the torpedoing and sinking of Arthur Andersen by federal prosecutors, do we really think it is appropriate to go after another one of the big auditing firms in the same way? Even the justice department has seen the need to soften the Thompson memo. And Steve Jobs has much more than "star power" and wealth; he (and we seem to have empirical market confirmation of this) is a key element of the Apple shareholder value equation. Should the interests of shareholders be ignored in determining how and whether to sanction conduct that, in any even, is open to multiple interpretations? Should a board ever be blind or deaf to shareholders' economic interests, i.e., become scared into becoming a mere prosecutorial arm of the government? I think boards that do that are violating their fiduciary duties.

The real lesson here is that Mr. Jobs needs to do some succession planning, pronto.

[M.D. Fatwa]

The market and the law are, of course, two different things. The market cares about getting ripped off, but if you rip investors off a little (and CEO compensation, no matter how outrageously high, is still a little in the larger scheme of things), but you deliver even more in return, the market will look on you kindly. That's why Apple's share price dipped when it looked like Jobs might get fired, and rebounded when it became clear he wouldn't.

Of course, the market will look on you even more kindly if you delivered results and DON'T rip off the investors...

[xyz]

So you say that the Board should have already kicked Jobs's ass even if their didn't find any evidence that he knew what Heinen and Anderson were doing was illegal? (note: backdating itself is not illegal. Not disclosing it is.)

And even if Jobs in fact knew exactly what was taking place then why don't you ask whether he lied to the special comittee?
Why do you convict Gore and York and everyone else who did the internal probe already?

Yeah, that's the kind of justice you deserve. Some seculation, innuendo and all of a sudden you are guilty. I wish it happened to you.

Come back when YOU reviewed all the documents when YOU interviewed all relevant individuals.Come back when YOU know all the facts and I mean all not just a few murky details here and there.

The special comittee did investigate this matter and you didn't. All you have is what some in the media say and write.
Therefore you have zero credibility on this issue.