Shareholder Forum for Options Policies

Forum Home Page

Options Policies Home Page

Program Reference


New York Times, December 30, 2006 article


The New York Times
December 30, 2006

Apple Panel on Options Backs Chief


SAN FRANCISCO, Dec. 29 — Apple Computer said Friday that a special committee of its board had found that its chief executive, Steven P. Jobs, was not responsible for improper dating of stock options at the company. To account for the backdating, Apple restated its financial reporting back to 2002 and took an $84 million charge.

Investors were cheered by the news, which was contained in the annual report Apple filed with securities regulators; Apple’s stock rose 4.9 percent to close at $84.84. But the report failed to completely remove a cloud hanging over the company as a result of the backdating of options and improper record keeping, especially concerning two large option grants made to Mr. Jobs in 2000 and 2001.

In its summary of the findings of a six-month internal investigation, Apple said it had found that 6,428 option grants, or 15 percent of the 42,000 options it awarded, had been improperly dated from 1997 to 2002. Those included grants made on 42 separate dates to senior executives, new hires and ordinary employees.

Investigators, led by a committee of outside directors and the law firm Quinn Emanuel Urquhart Oliver & Hedges, raised “serious questions” about the actions of two former company officers who were involved in the accounting and reporting of stock options, Apple said. But they absolved Mr. Jobs by concluding that there had been “no misconduct” by Apple’s current management team.

The report did offer a subtle shift in Apple’s description of Mr. Jobs’s role in the option process. In October the company said that Mr. Jobs was aware that favorable grant dates had been selected, but that he did not benefit from those grants and was unaware of the accounting implications. But in the report issued Friday, Apple acknowledged that Mr. Jobs “was aware or recommended the selection of some favorable grant dates.”

Some accounting experts questioned the company’s explanation of the part Mr. Jobs played in the grants.

“It appears as if Jobs is playing the role of a monkey: See no evil, hear no evil, speak no evil,” said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission. “If he truly were fulfilling his role as C.E.O., it is highly questionable as to why he didn’t know about such poor management and oversight of the option granting process.”

An Apple spokesman, Steve Dowling, said the company would have no comment beyond the report. Apple still faces investigations by the Justice Department and the S.E.C.

Apple is perhaps the most high-profile company to be entangled in backdating problems, which became the year’s biggest financial scandal, and Mr. Jobs is the best-known business leader to be pulled into it to date. So far, the S.E.C. is looking at the practices of more than 120 companies, and the Justice Department and Internal Revenue Service are conducting separate investigations. Dozens of chief executives have been fired or forced out.

Backdating involves retroactively setting a stock option’s grant price to a date when the stock price was lower in order to build in a profit. It is not necessarily illegal, but it can have serious accounting, tax and disclosure consequences and is generally frowned upon by corporate governance experts.

The discussion of stock option practices in Apple’s report was mostly focused on the accounting implications, and it offered few details on the potential tax and disclosure issues. It also did not address what appear to have been lax controls at the company.

Mr. Turner said it appeared that Apple had practiced “pick a date, any date” accounting. He added: “Their disclosures provide less than transparent reasons for why certain dates were picked.”

The special committee that looked into the options practices included an outside director who was responsible for handing out some of the options during the period in question. Jerome B. York, an I.B.M. and Chrysler executive who served on Apple’s compensation committee from August 2001 through November 2002, was joined on the committee by Eric E. Schmidt, the chief executive of Google, and Al Gore, the former vice president, who served as chair of the group. Mr. York recused himself from the committee at times when he felt that his own actions were under scrutiny.

The report points the finger at two former officers who are not named, but they are believed to be Nancy R. Heinen, Apple’s former general counsel who left the company in May, and Fred D. Anderson, the former chief financial officer and a former member of Apple’s board. Mr. Anderson left the company in 2004 to join an investment firm and left the board in October, the same day Apple released some details about its options investigation.

Jerome Roth, a lawyer representing Mr. Anderson, said in a statement that his client was “disappointed to learn” that during part of his tenure at Apple, the company “was not strictly complying” with its option granting processes.

Mr. Roth added that as chief financial officer, “Fred did not play any day-to-day role in the granting, reporting and accounting of stock options, and he was not involved in any knowing manipulation of the process.”

Ms. Heinen and her lawyer, Cristina C. Arguedas, did not return phone calls seeking comment. Ms. Arguedas said earlier this week that Ms. Heinen had “a well-earned reputation over 20 years for honesty and integrity, and any rumors to the contrary are without foundation.”

The Apple report focused new attention on two large option grants made to Mr. Jobs in 2000 and 2001. Mr. Jobs canceled all of those options in March 2003 after a steep decline in Apple’s stock.

That same month, however, the company’s board awarded Mr. Jobs five million shares of restricted stock, worth almost $75 million, that would not fully vest until 2006. Apple has said that Mr. Jobs never financially benefited from the option awards, which potentially alleviates many of the tax issues surrounding any grants, but not the potential accounting and disclosure consequences.

Apple investigators said a grant of options to buy 7.5 million shares was inaccurately recorded as having been approved at a special meeting of the Apple board on Oct. 19, 2001. The investigation revealed that there had been no meeting on that date. The terms of the grant were not finalized until Dec. 18, 2001, when Apple shares were trading $2.71 higher. Apple did not explain the discrepancy.

The company said on Friday that it had taken a $20 million charge related to the improper grant, but investigators found there was no evidence that any current Apple executive was aware of the irregularity.

Apple’s investigators did not find any problems with another 10 million options that Mr. Jobs received in January 2000, but that award, one of the biggest grants of all time, was somewhat unusual.

Typically a board or compensation committee approves a chief executive’s stock option grant immediately after coming to an agreement on its terms. In this case, Apple’s investigators found that the board authorized granting Mr. Jobs up to 15 million stock options on Dec. 2, 1999, when the shares were trading at $110.19.

The chief executive compensation committee “finalized the terms of the grant” on Jan. 12, 2000, the report said — when the stock was trading at $87.19, a six-week low. Then the committee waited six days before formally approving that price, even though the stock was trading at $103.94 at that time.

“Normally the delay is about six minutes, not six days,” said Brian Foley, an independent compensation consultant in White Plains. “And if the formal committee vote or consent is delayed to a later date, the grant date is that later date.”

The report, he added, “appears to attempt to skate around the critical issue of when the committee approved the grant, rather than face it head on.”

An Apple news release dated Jan. 19, 2000, and filed with regulators provides a little more clarity. “Steve’s stock options were granted a week ago at the then-price, and will gain value only as Apple’s stock price rises,” noted an Apple board member at the time. The board member was Jerome B. York.

John Markoff reported from San Francisco and Eric Dash from New York.





This Forum program is open, free of charge, to all shareholders of the invited corporate participants, and to any fiduciaries or professionals concerned with the investment decisions of those shareholders, according to the posted Conditions of Participation.  The Forum's purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their investment interests described in the Forum Summary As stated in the Conditions, all Forum participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program has been organized with the support of Hermes Equity Ownership Services, Ltd.  It is the first in an expected series that will be managed by a not-for-profit “Institute” to be established for the purpose of continuing the Forum programs conducted by Gary Lutin.

Inquiries and requests to be included in the Forum's distribution list may be addressed to  The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material.

All material on this web site is published by Gary Lutin, who is responsible for conducting the Forum.