McAfee and the indirect Apple Rule

I've been wondering whether Steve Jobs is going to escape criminal liability under an exception I've called the Apple Rule. The latest ripple is the recent indictment of McAfee's general counsel, Kent Roberts. Dealbreaker says:

It's notable that the prosecutors seem to have concluded that the self-dealing trigger was pulled when Robert's manipulated his own grant even though he never cashed out the backdated options. This is important because the "no gain from backdating" has become a major line of defense for some corporate executives, including Apple chief Steve Jobs. So the question remains: will the feds indict Jobs or will the "Apple Rule" continue to protect him?

Well, there's somebody else involved here. As discussed in today's WSJ, former McAfee CEO George Samenuk knew about a 2002 change to his stock option grant, though he hasn't been criminally charged and, according to his lawyer, doesn't expect to be. The article says that the compensation committee on January 15, 2002 initially approved a grant of 420,000 options at that day's closing price, $27.19. The next day the stock dropped and GC Roberts sent a note to Samenuk and another executive saying "Let's price the 420,000 option shares at today's closing price of $25.43."

The article says "That change would have a big effect, increasing Mr. Samenuk's potential profit from the grant by $739,200," comparing that sum to Samenuk's 2001 salary of $714,922. [Again we have the misleading emphasis on the gross difference in exercise price rather than the value of the option, especially problematic here since the option was never exercised.]

The WSJ article continues:

The next week, according to the SEC, Mr. Samenuk wrote back to the two executives: "On January 16 it appears that the stock price finished at $25.43...is this the price that the new options will be set at?? Is that the low for those days after the Board Meeting??" Mr. Roberts, the SEC said, replied that the figure was "the right price." According to the agency, Mr. Roberts wrote up false board minutes saying that the grant was intended to be made Jan. 16.

Samenuk's lawyer notes that the GC "determined what was the 'right price'" and that the "paperwork * * * showed the higher price of $27.19." However, the WSJ says, "It isn't clear why the paperwork would show a higher price. The company's securities filings record the lower one."

Assuming Samenuk isn't charged, why not? Apparently not because he didn't exercise his option, because the same is true of the GC who was charged. Is it because some paperwork showed the strike price of $27.19? But Samenuk apparently knew about the lower price. Also note that the company apparently disclosed the right price (as is typical in these cases – part of the immateriality of backdating).

The bottom line seems to be that the Apple Rule protects an executive who lets an underling do the messy backdating, even if the executive knows about it. While Samenuk isn't a popular well-known executive like Jobs, we need to have an "indirect Apple rule" for executives whose indictment would set an unpleasant precedent for an executive who is protected by the "direct Apple rule."

In the end I expect that the biggest mess left by the backdating "scandal" will be a widespread perception of unfairness in the criminal justice system.