Disney and the Apple rule

As readers of this blog know, the Apple rule is what keeps popular and successful executive Steve Jobs from being tarred with the same backdating brush that’s been applied to less popular executives. Of course, if Jobs were charged, and Apple crushed, lots of people might start asking whether this whole corporate crime thing has gone too far.

Today we learn from the WSJ that a Disney report on backdating at Pixar has concluded that “no one now associated with Disney committed 'any intentional or deliberate acts of misconduct.'" Steve Jobs is a Disney director.

We already know that Jobs signed an Apple disclosure statement on Aug. 8, 2002 with a false option price and date. However, Apple found no evidence Jobs knew of the false records, or that Jobs understood the accounting. Apple said that Jobs didn't benefit from the options because he didn't exercise them. (In fact, Jobs did benefit.)

Here’s what we know about Pixar: John Lasseter’s March 21 Pixar contract, which Jobs helped negotiate, included “1,000,000 shares of our common stock at the fair market value on the date of such grant," according to a Pixar SEC filing. The options were dated Dec. 6, 2000, with a 12/5 strike price – the low for the year. By March 20 the shares were up 24%, or $6.4 million. Lasseter reported the options to the SEC on May 9, 2001. On March 12, 2001 Lasseter filed a Form 4 reporting the sale of Pixar shares but didn’t mention the December options. Among other suspicious details the WSJ noted, Lasseter’s Form 5 filing said the options expired Dec. 6, 2010, or 10 years after the apparently backdated date, not the 3/21 contract date.

Interestingly, today’s WSJ also reports that the former controller of Engineered Support Systems Inc., Steven Landman, pleaded guilty to a false statement charge.

According to the document charging Mr. Landmann, the unnamed senior executives "took actions to avoid detection," including backdating letters that accompanied option grants to make it appear that the letters had been created around the time of the grants. The false-statement charge against Mr. Landmann suggests that prosecutors may have a wide berth to bring cases against executives in the broader backdating scandal. Mr. Landmann is charged with making a false statement because of lines in the company's annual report saying, among other things, that options were granted with a price equal to the stock's value on the day they were granted. They weren't, the authorities allege, and were instead backdated to earlier days when the stock price was lower, handing the executives extra value.

Was Landmann doing anything intentionally or deliberately wrong in the Steve Jobs sense?  He doesn't seem to have gained from the backdating. Jobs apparently only signed a false record and helped negotiate a backdated option, but didn't know the accounting was wrong or that the record was false. (But did he read the record?  If so, did he see the date?) Landmann actually wrote down the false date and evidently knew that you're supposed to write down the real date. Ah, maybe that's it.

We don't know all the facts in these cases, but we seem to be making some mighty fine distinctions, don't we?

Comments

[jbelkin]

Remember that getting backdated options are NOT a crime - you might call it unethical or even immoral as a senior mgmt officer but it by itself is not illegal unless a) you convey some special board meeting in secret to grant it to yourself or b) you grant them to yourself in secret.

AS it was "semi-standard" practice for a board to backdate options (again, I'm not making a value/ethical judgment) - for Jon lassetter, it was just another day at the office - a good day but fairly normal.

Just because Steve Jobs signed a form saying options were granted on such and such and it was incorrect is not a criminal act since no monies went into his own pocket - a housekeeping error - a fine, sure but anything more would be pointless.

[Larry Ribstein]

First, he probably did benefit (see my earlier post on this). Second, it can be a criminal books and records violation whether he benefited or not. My point isn't that this should be criminal (and certainly all facts are not known) but that we have to decide what is criminal on a principled basis.

[elmor fudwell]

What a pretty website. I like your colours and layout. Pretty well covers everything here.....

[Landmann increased his OWN pay]

"Federal regulators charged two former executives of Engineered Support Systems Inc. with a long-running scheme to backdate stock options at the defense contractor, saying that THE PAIR IMPROPERLY INCREASED THEIR OWN PAY and that of other top officials by a total of $20 million." WSJ, Feb 6, p.A4 (emphisis added)

[lou f]

From Economist.com
"Cost-benefit analysis is largely absent from America’s approach to regulating business wrongdoing,.. At the very least, encouraging the Department of Justice and the Securities and Exchange Commission to employ a few less lawyers and a few more economists would be a step in the right direction."

[gbig]

To remind all - there are two types of activities in regard to options dating.

1. options dated according to a consistent process in which the dates applied are applied ONCE and not altered.

2. options dated irregularly with dates possible reset to take advantage of better pricing.

The whole mess comes from the Iowa Professors idea that many options were timed to coincide with market dips. He has done statistical work to theorize that many companies had a practice to do that. The rub is, it may be as much coincidence, as in the case for companies that processed options in a consistent manner, say, issued them when their list of names was complete, or issued them in the beginning of a given monthe EACH time they did so. Or, in the case for Apple and Pixar in regard to Mr. Jobs who seemed to have arranged for speicial options dating for at least two grants, one for him at apple (a potentially board-unauthorized grant), and at Pixar for Mr. Landman. Time will tell if what Jobs was involved in was enough different from coincidence that he will have crossed some abstract line.

[lou f]

interesting point gbig however regarding the
statistical work done by Professor Lie and popularized by the WSJ to create a backdating
"scandal" there is another recently published research paper by NERA .
which we haven't heard much about from the business media. The NERA paper examines many misconceptions currently circulating about the statistical calculations that have been used in connection with backdating --claims, "The scope of current academic literature on backdating has been limited to methodologies designed to detect aggregate patterns, rather than analyze specific companies."Because of this, these studies do not disentangle legal from illegal practices ..."
read it here:
Title: Options Backdating: The Statistics of Luck.
NERA Insights: Options Backdating Series, Part III
published March 8 2007
http://www.nera.com/publication.asp?p_ID=3076

[DWalla]

Kind of hard to show harm to the investors when Steve Jobs has taken this money from nearly junk stock status to mind-blowing wealth in less than a decade.