Stock options backdating haunts Apple

Try as it may, Apple Computer seems unable to put its stock options backdating scandal to rest. While the company has already cleared all of its current executives of blame and Steve Jobs, the chief executive, has apologised for the lapses, the matter continues to shed an unflattering light on internal practices at one of the world’s most successful technology and consumer electronics companies.

In the latest sign of Apple’s continuing problems, Mr Jobs himself received at least one grant of options that was made without proper authorisation and was apparently backdated. Shares in Apple fell by nearly 2 per cent in midday trading on Thursday after the revelations.

The grant of 7.5m options, made in late 2001, was never approved by Apple’s full board of directors, as required by its internal rules, according to two people familiar with the matter – yet documents were falsified to show that this meeting had indeed taken place. Since that supposed board approval was recorded some time after the date at which the exercise price on the options was set, it also indicates that the benefits were backdated.

Apple had already reported in October this year that Mr Jobs was “aware” of backdating at the company in a small number of instances, though it also said he “did not receive or otherwise benefit from these grants and was unaware of the accounting implications.” It also said an internal investigation had raised “serious concerns” about the actions of two former officers, believed to be Fred Anderson, former chief financial officer, and Nancy Heinen, former general counsel, and had handed details to the Securities and Exchange Commission.

The latest revelation adds several new twists to this picture. One, not directly related to the backdating issue, suggests Apple’s internal controls on compensation were surprisingly lax.

According to one person briefed on the matter, the irregularities surrounding Mr Jobs’ 2001 options amounted to technicality, albeit a big one, rather than a material or important breach of procedure. The compensation committee made up of Apple independent directors had already approved Mr Jobs’ remuneration, and this was almost certain to have been rubber-stamped by the full board, though that step was never taken.

This argument draws heavily on an argument often heard in Silicon Valley in recent months to justify the options backdating scandals: that the lapses in compensation practice were a matter of technicality, not venality, and that the close attention paid to corporate governance in the post-Sarbanes Oxley world should not be applied, in hindsight, to events from another era.

According to this argument, it would have been easy for Apple executives, caught up at the time in a struggle to rebuild the company, to overlook pro-cedural niceties.

Yet the non-existent board authorisation has also handed a damning piece of evidence to enforcement officials who are now reviewing the case. The falsification of documents to suggest the meeting had taken place has supplied what is thought to be one of the only clear signs that Apple executives at the time acted to manipulate records.

Since Federal prosecutors have made clear that any cases to emerge from the broader backdating scandals will depend heavily on the question of being able to establish intent, that could make the documentation central to any decision on taking enforcement action.

It is not clear who at Apple prepared the documents, though the fact that the full board should have approved the options suggests that the lapse was a wider one that could touch others as well.

A further issue that continues to dog Apple concerns its claim that Mr Jobs “did not receive or otherwise benefit from” backdated options. It is certainly the case that Mr Jobs never benefited directly: he surrendered all his options in 2003, at a time when they were underwater, and was given 5m shares of restricted stock in the company instead. Apple said at the time that Mr Jobs had given up his options “voluntarily,” implying that there was no direct link between that and the restricted stock he was given at the time.

Mr Jobs has already apologised for the fact that Apple backdated some of its options, and Apple continued to stress this week it had handed over all information it has to the SEC.

For now, though, this looks like an issue that will continue to haunt both Mr Jobs and the Apple empire.

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