Apple Derivative Plaintiffs Allege Option Springloading

In their Consolidated Amended Shareholder Derivative Complaint filed December 18, 2006 in the federal court in San Jose, the plaintiff in the Apple Computer shareholders derivative action have zeroed in on alleged options springloading practices. A January 3, 2007 Los Angeles Times article entitled “At Apple, Timing Led to Overnight Windfalls” (here) describes the allegations.

The Amended Complaint alleges that three Apple executives received a windfall on August 5, 1997 when they were granted options to buy over 2 million shares, the day before Apple CEO Steven Jobs announced during a keynote speech at the MacWorld conference that Microsoft would invest $150 million in Apple and share patented technologies. Apple’s agreement to put Microsoft’s Internet Explorer on Macintosh computers sent Apple’s share price up 48 percent in two days. The options vested in installments over a three year period, during which Apple’s share price tripled. The three Apple executives who received the shares were Chief Financial Officer Fred Anderson, Controller Robert Calderoni and Senior Vice President Jonathan Rubinstein.

The Amended Complaint also alleges that Jobs himself received two backdated options grants in 2000 and 2001, but that in March 2003, Apple canceled the options in exchange for 5 million shares of restricted stock. Jobs sold the restricted stock the day they vested, March 19, 2006, the day after the Wall Street Journal ran its front page article entitled “The Perfect Payday” (here) that launched the whole backdating firestorm.

Apple’s Backdating Disclosures: The Dance of the Seven Veils? In its December 29, 2006 press release (here), Apple announced the completion of its internal investigation of its stock options practices. The release contained a joint statement from the chair of the board’s special investigative committee, former Vice President Al Gore, and the audit committee chair, Jerome York, stating, among other things, that Apple’s board “has complete confidence in Steve Jobs and the senior management team.” In its 10-Q filed he same day (here), Apple detailed the results of its investigation, stating:

Based on a review of the totality of evidence and the applicable law, the Special Committee found no misconduct by current management. The Special Committee’s investigation identified a number of grants for which grant dates were intentionally selected in order to obtain favorable exercise prices. The terms of these and certain other grants, as discussed below, were finalized after the originally assigned grant dates. The Special Committee concluded that the procedures for granting, accounting for, and reporting stock option grants did not include sufficient safeguards to prevent manipulation. Although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications. The Special Committee also found that the investigation had raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants.

The report does not identify the two officers, but press reports (here) suggest that they are Fred Anderson (who resigned as Apple’s CFO in 2004 and left Apple’s Board in September 2006) and former general counsel and corporate secretary Nancy Heinen, who resigned in May 2006.

In an earlier SEC filing, Jobs expressed his contrition for these practices. In Apple’s October 4, 2006 8-K (here), Jobs stated “I apologize to Apple’s shareholders and employees for these problems, which happened on my watch.”

Apple’s board exoneration of Jobs has drawn harsh criticism. A January 5, 2007 San Jose Mercury News article entitled “Apple is Giving Jobs a Free Pass, Critics Say” (here) quotes Lynn Turner, a managing director of shareholder advisory firm Glass Lewis and the former SEC chief accountant, as saying “Apple’s board derserves an ‘F’ for how it handled its backdating investigation.” A January 4, 2007 BusinessWeek.com article entitled “Is Steve Jobs Untouchable?” (here) suggests that Apple’s board and investors alike may prefer a go-softly approach with Jobs because of his iconic status and his franchise value to the company.

But while Apple’s board may prefer that Jobs is given a pass, there may be too many questions for Jobs to escape further scrutiny. In a January 6, 2007 Wall Street Journal op-ed piece entitled “Inside Jobs” (here, subscription required) Harvard Law School professor Lucien Bebchuk raises a host of concerns about the troubling unanswered questions in Apple’s board’s special investigation report.

And there are still the governments investigations (here). The SEC and the U.S. Attorney’s office are both investigating Apple’s options practices, and they undoubtedly will insist on answers to the unanswered questions. In addition, some commentators have suggested that government investigators may also be interested in Apple’s disclosures about its options practices. The BusinessWeek.com article linked above contains the comment that

Some lawyers say government investigators may be troubled that Jobs’s role in the backdating has appeared to grow with each of the four filings since Apple first reported last June, and could cause them to question the reliability of Apple’s findings. "One of the factors the SEC looks to is [whether there is] full and complete public disclosure, not the dance of the seven veils," says one highly regarded securities lawyer.

With all of these questions, it is understandable that, according to today’s Wall Street Journal (here, subscription required), “When he hops onto the stage to kick off the MacWorld conference in San Francisco Tuesday, Apple Computer Inc. Chief Executive Steve Jobs will seek to return the spotlight to innovative gadgets and away from a stock-option backdating mess at the company that has nabbed headlines for months.” The D & O Diary suspects that this year, there won’t be a massive award of stock options to Apple executives the day before the MacWorld conference.

Special thanks to a loyal D & O Diary reader who prefers anonymity for the link to the Los Angeles Times article.