Apple CEO Knew of Backdating
Apple Computer Inc. said Wednesday that Chief Executive Steve Jobs knew the computer maker had sometimes changed the grant dates on stock options to make them more valuable -- an improper accounting practice that has tripped up more than 100 companies.
Apple said a three-month internal investigation into the timing of stock option grants had resulted in the resignation of former Chief Financial Officer Fred Anderson from its board of directors.
The Cupertino, Calif., company also said it had expressed “serious concerns” to the Securities and Exchange Commission about actions taken by two former officers, whom it did not name, related to stock option grants.
The company said in a news release that Jobs did not receive or otherwise benefit from any of the improperly granted stock options, and he was not aware of the accounting implications of the practice at the time. The investigation found no misconduct by current Apple employees.
But the CEO issued a rare apology for letting the problems happen “on my watch.”
“I cannot recall a single time in the last 20 years in which Steven Jobs has apologized for anything,” said Darren Robbins, a San Diego attorney who has brought one of the half-dozen shareholder lawsuits stemming from the option improprieties. “This release, although couched in terms which are designed to minimize the misconduct of the executives and the board members, raises very serious concerns for Apple’s shareholders.”
The company found 15 cases from 1997 to 2002 in which stock options were granted on a certain date, then recorded as having been granted on an earlier date. An Apple spokesman said that represented 6% of the dates on which options were granted during that period.
When not disclosed, the practice of so-called backdating is illegal because it can artificially boost the value of stock options without shareholders’ knowledge. Two former executives of Brocade Communications Systems Inc. were charged with securities fraud in July. Vitesse Semiconductor Corp. fired its chief executive and two other executives over option questions. Mercury Interactive Corp. did the same.
“I apologize to Apple’s shareholders and employees for these problems, which happened on my watch,” Jobs said. “They are completely out of character for Apple. We will now work to resolve the remaining issues as quickly as possible and to put the proper remedial measures in place to ensure that this never happens again.”
Several Wall Street analysts expressed relief. Many had worried that an investigation would show that Jobs, already a billionaire, had been further enriched by tainted stock options and would be forced to resign.
“Steve Jobs is off the hook, and that’s good news for Apple,” said Charles Wolf, an analyst at Needham & Co. who owns Apple stock.
But shareholder advocates said Apple’s response was insufficient to quell investor anger.
“Clearly an apology isn’t enough to satisfy shareholders,” said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, who called for the firing of Apple’s compensation committee. “Backdating meant manipulation of pay packages that took money out of shareholders’ pockets. Shareholders need to be compensated for that manipulation.”
Apple shares gained $1.30, or nearly 2%, to $75.38, then lost 58 cents in after-hours trading following the announcement.
Apple first disclosed in June that an internal investigation had turned up irregularities involving certain stock grants, including one issued to Jobs that was subsequently canceled.
In August, Apple said General Counsel Nancy R. Heinen had left in May after nearly a decade running the legal department. She then retained two criminal defense lawyers. An Apple spokesman would not say whether Heinen and Anderson were the two former officers whose actions were referred to the SEC.
Anderson served as Apple’s CFO from 1996 to 2004. He now works as a managing director at Elevation Partners, a Silicon Valley private equity firm whose investment team includes former Electronic Arts Inc. President John Riccitiello and Bono, lead singer of the rock band U2.
Elevation managing director Roger McNamee issued a statement praising Anderson, who declined to comment.
“I have been impressed with his thoroughness, his uncompromising character and the high professional standards to which he has held himself,” McNamee said. “We are proud to now have Fred as part of our team at Elevation Partners and look forward to his continued service.”
Heinen could not be reached for comment, and her lawyers did not return phone calls.
Jobs is one of the few CEOs who have publicly admitted knowing about the use of backdating, which at its most extreme amounts to looking back on the calendar and choosing the most favorable recent prices for option grants.
“I don’t think a public apology is going to satisfy the SEC or the litigation bar or shareholders more generally,” said Patrick McGurn, executive vice president for Institutional Shareholder Services, an investor advisory firm. “I don’t think Jobs will be gone, but I think he’s in for a substantial amount of additional criticism, as will other members of the board.”
Chmielewski reported from Los Angeles, Gaither from San Francisco.