Next Chapter Re: Apple’s Backdating Woes

On Friday, December 29, 2006 Apple Computer filed its delinquent 10-K and 10-Q reports, restating certain results and taking a non-cash charge of $84 million related to its improper stock option transactions.  The reports reiterate the conclusion  of a Special Committee headed by Al Gore which found no misconduct by current management but serious questions about the conduct of two prior officers.  The reports also acknowledge that the company’s founder and CEO, Steven Jobs, “was aware or recommended the selection of some favorable grant dates [but] he did not receive or financially benefit from these grants or appreciate the accounting implications.”  The reports detail a number of errors in the option granting process. 

No doubt Apple hopes that completing its stock option probe and filing its SEC reports is the end of the matter.  New reports, however, suggest otherwise.  According to, The Recorder, a trade journal in San Francisco, claims that federal investigators are looking into the question of whether Apple may have falsified documents in connection with improper stock option grants.  A report by the Financial Times also raises questions about the extent to which Mr. Jobs’ reputation may be harmed by the matter.  According to the Financial Times, a few day before Apple introduced the iPod music player on October 23, 2001, Mr. Jobs was given 7.5 million options without the required authorization of the company’s board and at a near low point for the stock.  Later when these options were underwater following a stock split, Mr. Jobs surrendered them and received restricted stock.. 

The issuance of these options appear to coincide with those detailed in Apple’s SEC filings, which were recorded improperly as having been approved at a board meeting that did not take place.  According to Apple’s SEC filings on Friday, one set of improperly issued options had a grant date of October 19, 2001.  This grant was approved originally at a Board meeting on August 29, 2001 with an exercise price of $17.83.  The terms of the grant were not finalized until December 18, 2001.  The grant ,however, was dated October 19, 2001 with an exercise price of $18.30.  According to Apple, the “approval for the grant was improperly recorded as occurring at a special Board meeting on October 19, 2001.  Such a special Board meeting did not occur.  There was no evidence, however, that any current member of management was aware of this irregularity.” 

Although Apple claims it is continuing to cooperate with the DOJ criminal and the SEC civil investigators, it is unclear if cooperation will be sufficient to forestall charges.  Questions have been raised since the beginning concerning Apple’s handling of the matter.  When Apple initially learned it might have stock option problems and received requests for information from the government, the company chose not to disclose the matter for months.  Later when it did disclose the matter the company stated that it had no obligation to make any earlier disclosure.  As we noted in an earlier entry in blog, that is an accurate statement of the law.  Whether it is the best shareholder relations or evidences cooperation has yet to be seen.  See Blog entry 9/5/06 “A Difficult Choice: “To Disclose Or Not To Disclose” an SEC Investigation.”