Posted on 12/26/2006 7:32:21 PM PST by Swordmaker
It must be some consolation for Apple Computer that the company's annual report is going to be published during the slowest news week of the year.
Given the uncomfortable admissions about its past stock options practices -- and the cost to the company -- that Apple will have to make in the delayed SEC filing due by Friday, less public attention is probably a good thing.
But the lull is unlikely to last long. According to people with knowledge of Apple's situation, federal prosecutors are looking closely at stock option administration documents that were apparently falsified by company officials to maximize the profitability of option grants to executives.
The faked documents were revealed in a three-month internal probe -- conducted by Quinn Emanuel Urquhart Oliver & Hedges -- that concluded in October, said individuals familiar with the case who requested anonymity because it remains the subject of criminal and civil government investigations.
The falsification of documents is perhaps the key issue for government officials trying to determine which of their 100-plus backdating investigations will be pursued as criminal matters and which will be limited to civil SEC inquiries.
"When there are falsified documents, the government views them as an intent to defraud, because people generally don't falsify documents unless they're trying to make things different from reality," said Keith Krakaur, a partner at Skadden, Arps, Slate, Meagher & Flom in New York working on backdating cases.
Krakaur was speaking generally and not about Apple, with which he's not involved. But he has been in the middle of one of the most contentious options cases yet: He represented Kobi Alexander, the former CEO of Comverse Technology who was indicted by Brooklyn federal prosecutors on charges of backdating option grants. Krakaur is no longer working on that case, and Alexander has been living as a fugitive in Namibia for the past several months.
Krakaur and other defense lawyers -- including several in San Francisco who asked to remain anonymous for fear of affecting local probes -- said government lawyers are focusing on falsified records as a means of proving that executives knew their actions were wrong.
"They view that as intent," he said.
Since the fruits of Apple's internal investigation were disclosed to San Francisco federal prosecutors in October, the U.S. Attorney's Office has shown great interest in the case, said individuals with knowledge of the probe.
And while it's not yet clear who the prosecutors' focus is, Apple released a statement in October that "the investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants."
Apple spokesman Steve Dowling wouldn't comment beyond what is in the public filings. But individuals with knowledge of the case said those ex-officers are Nancy Heinen and Fred Anderson, the company's former general counsel and chief financial officer, respectively.
Heinen departed the company last spring -- before the options scandal blew up -- and sources familiar with her situation said the departure was the result of a tiff with CEO Steve Jobs unrelated to options. Reached last week, Heinen lawyers Cristina Arguedas and Miles Ehrlich wouldn't discuss their client.
Anderson, who retired as CFO in 2004, was an Apple board member until he resigned in October. His lawyer, Jerome Roth of Munger, Tolles & Olson, declined to comment on his client's situation.
One outstanding question with possibly huge implications for the company is what kind of liability Jobs -- the superstar CEO credited with much of Apple's success -- will face.
In its October SEC filing, Apple said that, "in a few instances," Jobs "was aware that favorable grant dates had been selected, but he did not receive or otherwise benefit from these grants and was unaware of the accounting implications." The statement said no current Apple executive was suspected of wrongdoing.
But in recent weeks, Jobs has apparently decided that he needs his own legal representation, separate from Apple's lawyers at O'Melveny & Myers, and has hired his own attorney to deal with the SEC and Justice Department.
While it will likely take some time -- perhaps a matter of months -- for the government to decide whether to file criminal charges against Jobs, the 10(k) filing on Friday should provide plaintiffs lawyers with some ammunition for their suits against the company.
"We anticipate it's going to be a very substantial restatement, based on the option grants on record," said Mark Molumphy, a partner at Cotchett, Pitre, Simon & McCarthy representing shareholders in a securities class action against Apple.
In its October SEC filing, Apple said "stock option grants made on 15 dates between 1997 and 2002 appear to have grant dates that precede the approval of those grants."
Dowling, the Apple spokesman, said the company is going to adhere to its plan to file the 10(k) by Friday, a date reached in an accord with NASDAQ after Apple announced the options issues would prevent them from filing by the normal Dec. 15 deadline.
But even if Apple misses the filing date, the company may get a reprieve from the normal sanction of delisting, if only because the exchange would be hesitant to prevent normal trading of a company of such great significance to investors.
"Who's served by the delisting of Apple?" asked Jahan Raissi, a partner at Shartsis Friese who represents companies in SEC matters. "If it was Joe's Shlock and Poultry Farm, then sure, get them out of there. But not Apple."
"While it will likely take some time -- perhaps a matter of months -- for the government to decide whether to file criminal charges against Jobs, the 10(k) filing on Friday should provide plaintiffs lawyers with some ammunition for their suits against the company."
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Is this FUD? I think it is.
Who goes to Namibia to escape justice?
There has to be a better place.
Don't know where you are going with this... but Steve Jobs and other CEOs are probably going to jail. Billions of dollars have been stolen from the shareholders for years. This is not small potatoes that have been "rehashed"!
The sticky part about this scandal is that it has all been documented and is a sure thing. When the only option left is falsifying documents in an attempt to avoid lengthy jail sentences... these corrupt corporate officers are between a rock and a hard place.
And they have to pay taxes on all those real dates etc.
I think there is as much chance of Steve Jobs going to jail as OJ.
Not to worry! Al Gore will be on the Apple BOD to fix things up.
Steve Jobs has got to be one of the greatest con men in the history of the world. Apple consumers are a cult and I'm glad to say I've never fallen under the spell.
I'm not really sure who's harmed by this situation.
If I understand correctly - and hopefully someone can correct me if I'm wrong - the problem is this.
Say Apple stock was worth $10 in January. Then it rose to $30 in March. If I was an employee granted stock options in March, they would let me buy the shares for $30 at any time. If my options were backdated to January then I could buy it for $10 at any time.
So if I had an option on one share for $10, today I could sell the stock for $90 and get $80 minus commissions. If I had it for $30, I could sell it for $ 90 and get $ 60 minus commissions. This means the company would not receive $20 (for the stock it was selling).
Since the money that's changing hands seems pretty theoretical, this is an easy crime for the guy on the street to ignore. But as I have shown it could mean enormous changes in the pay of executives. That's why it was done for so long and at so many companies.
Of course in Apple's case the shares have advanced to such dizzying heights in recent years that it's difficult to believe these differences are meaningful to shareholders. If you bought your Apple stock in 2001 at $16 and now you have two Apple shares at $90 each, you are, ahem, unlikely to be terribly upset at anything as arcane as stock options.
If I were a shareholder I'm not sure if I would even care if Jobs was an outright thief, as long as he continues to perform as he has for the company. In fact, since this investigation is a huge distraction for management, who should be developing the iPhone or getting the next Macs and iPods put together, I'd be downright angry that it was being conducted.
I think that harm to investors should be the primary measure of whether cases like this should be prosecuted. It would be almost impossible to prove harm to investors when the stock has performed as it has and so I think prosecution is extremely unlikely. It's not in the interest of shareholders or anyone else to send Steve and friends to jail.
D
You stick with Windows or Linux. I'll retain the competitive advantage over you with my Mac.
Sorry, you haven't the slightest idea of what you are talking about. Please demonstrate where ANY stockholder has had any money stolen from them.
Stock options are LEGAL... and even backdating stock options is LEGAL. It was legal when it was done and it is legal now.
The only quibble is about how it was accounted for on the company books and how it was reported.
It has also already been demonstrated that Steve Jobs did NOT benefit from the stock options granted at Apple by the Board of Directors' Compensation Committee.
By "rehashed" I was referring to the fact that ALL of this information has already been published, discussed, and reported on in the past months. There is absolutely nothing new here.
Thanks for proving my point!
You know, the really funny thing?
Apple Computer Inc. will probably get a REFUND of taxes it paid for the years impacted by the backdating... because they are being required to restate EXPENSES upward thereby reducing the taxable profits.
The offense, if there is one, is that Apple reported profits as being too high (!) by the amount of difference between the stated option date and the real option date... a very minor amount, really, in the overall P&L statement.
As I said 6 months ago, 2007 is going to be a bad year for Apple. And central to it will be its complete failure with the iPhone.
bosh. everyone knows apple can do no wrong.
Not quite right.
Say Apple stock was worth $10 in January. Then it rose to $30 in March. If I was an employee granted stock options in March, they would let me buy the shares for $50 (the strike price) at any time after the option matures (usually 1 to 3 years after issuance) and before it expires. If my options were backdated to January then I could buy it for (perhaps) $30 at any time after the option matures and before it expires.
The value of a stock option MUST be greater than the closing price for that stock on the date of issue by a considerable amount. Stock options are never issued with strike prices at or below the current market... that would have no purpose.
The purpose of a stock option is to give both deferred potential compensation and incentive to management level employees to increase the value of the company for ALL stockholders. The strike price and the window of execution are both targets... one for value and the other for WHEN that value should be reached.
Stock options are attractive to the company because they have little effect on current expenses (it's not a salary expense) and when the option IS exercised, it actually brings MORE capital into the company when a piece of paper in the Treasurer's vault, the already authorized but unissued stock certificate, is exchanged for CASH!
If the stock never reaches the strike price during the window of opportunity to exercise the option (between maturity date and expiration date), then the option has ZERO value and expires unexecuted and the employee goes uncompensated and unrewarded... rightly so, because he has NOT increased the value of the company for the other stockholders.
The ONLY impact stock options have on general stockholders is when, and if, dividends are paid, their dividend may be a fraction of a cent lower that it would have been IF the options had not been executed... but a knowledgeable investor would know that due to (in part) of those options, his stock had climbed from $30 a share to over $50 (or more). The few cents or fractions of a cent that is missing from his dividend because it was paid as the dividend to the holder of the optioned stock PALES in comparison to the $20 or more increased value his shares have increased!
The good news is that the feds are writing up this case with Office for Windows, so watch the documentation get eaten by a virus before the appeals are done.
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