SEC sees Apple backdating as one-woman fraud spree
Not far from the San Andreas Fault, a new fault line opened up in Silicon Valley yesterday — one that residents are actually thrilled to have discovered. We’ll call it the It’s All Nancy Heinen’s Fault. Heinen was Apple’s general counsel, and the SEC evidently believes she was the only one at Apple who engaged in any intentional wrongdoing in connection with that company’s repeated and blatant backdating. If only Heinen had also worked at Pixar.
In any event, we did get vivid new insight yesterday into exactly how the options backdating may have occurred at Apple (AAPL), as the SEC made public its civil complaint against Heinen and CFO Fred Anderson. (For the complaint, click here.) Anderson settled the less serious charges against himself and then filed an eye-opening press release of his own. Heinen, through her lawyer, still denies the complaint’s allegations and Anderson neither confirmed nor denied its accusations against him. (Anderson was only accused of failing to notice what Heinen was doing and failing to take affirmative steps to put things right.)
Apple, the company, is now home free, though the status of its CEO, Steve Jobs, remains slightly clouded. The SEC praised Apple for its “swift, extensive, and extraordinary cooperation,” citing in particular its “prompt self-reporting, an independent internal investigation, the sharing of the results of that investigation with the government, and the implementation of new controls designed to prevent the recurrence of fraudulent conduct.”
The cloud over Jobs stems from the written statement released by Anderson’s lawyer yesterday, which says that Anderson explained to Jobs the accounting implications of backdating in January 2001, at the time Jobs was backdating a 4.8 million-share grant to the company’s executive team, and 11 months before Jobs himself was granted 7.5 million backdated options.
The Executive Team grant, which was nominally dated January 17, 2001, worked like this, according to the SEC complaint. On January 30 Heinen emailed CEO Jobs and CFO Anderson spreadsheets laying out Apple’s stock prices for every day in the month of January, and recommending possible dates on which to retroactively date the grant. In her email to Jobs she wrote, “To avoid any perception that the Board was acting in appropriately [sic] for insiders prior to Macworld announcements, I suggest we use Jan. 10, the day after your Macworld keynote, at $16.563. That was one of the lowest closes of the month, after the $14.875 price on Jan 2. I don’t think the [Executive Team] would object to the $1.688 difference to avoid claims of inappropriate conduct.”
The email seems grimly ironic, since she evidently fears leaving the misguided appearance that they were springloading — granting options just before favorable news — when in fact they were backdating, which is even more underhanded. (How Jobs processed all this, I leave to you.)
Ultimately they settle on January 17 (stock price $17.813), and the paperwork — unanimous written consent forms, or UWCs—are drawn up falsely reflecting that board action was taken on January 17. Heinen finally collects all the signed UWCs on February 7, when the stock price is $20.75.
It’s not explained what each board member was thinking when he signed the UWCs in early February, but I suppose some may have really believed that the grant decision had been made on January 17 (though it was supposed to be the board’s decision to make, since there was no compensation committee at the time), while others didn’t examine the UWCs closely, and still others didn’t know what difference any of it would make. Still, one of the board members was Jerome York—a former CFO of IBM and Chrysler—a point former CFO Anderson emphasized in his lawyer’s statement yesterday. (York was also later named to the three-person special committee that conducted Apple’s internal investigation of the backdating. He has previously said that he recused himself from looking at decisions he was personally involved in. The others on the committee were former vice president Al Gore, who headed it, and Google (GOOG) CEO Eric Schmidt. Schmidt was formerly CEO of Novell, which has not yet completed its own internal inquiry into backdating that occurred there during Schmidt’s tenure.)
The conversation Anderson says he had with Jobs — in which he explained the accounting ramifications of choosing any date prior to when the board had actually given its approval — would have had to occur early in the process of awarding the grant, at a time when Jobs was planning to use the Jan. 2 date for the grant (the date Heinen thought would look too much like springloading). Anderson’s attorney says that Anderson “was told by Mr. Jobs that the Board had given its prior approval and the Board would verify it.” When asked about this account by the Wall Street Journal yesterday, Jobs referred the question to an Apple spokesperson, who declined comment.
Later that year, in August, the board decided to award Jobs a huge options grant, because a previously awarded 10-million share grant was now under water. By that time, Apple had set up a compensation committee, which consisted of York, Genentech (DNA) CEO Arthur Levinson, who chaired it, and Intuit (INTU) chairman William Campbell.
On August 29 the board decided (really, really decided) to issue Jobs’s options as of that date, when the price was 17.83. But subsequently Jobs became unhappy with the vesting schedule, and he and the compensation committee began haggling over that. (Technically, matters like vesting schedules are supposed to be settled already by the time the strike date is set, so this created an awkward situation.) The haggling went on for months, with the compensation committee holding meetings on October 16 and 19, and again on November 19 and 20. (Heinen, as corporate secretary, attended these meetings.) By mid-December, the complaint says, Heinen decided that the August 29 date would “no longer withstand scrutiny,” since, among other things, Apple’s fiscal year ended in late September, the relevant information had still not been supplied to auditors at KPMG, and the SEC filing deadline for reporting an August 29 grant had passed. So on December 17 she emailed the chair of the compensation committee, Levinson, with a spreadsheet of three months worth of stock prices and some recommended dates for backdating the grant. “There are several days in October and November, following the first meeting of the Compensation Committee . . . that are close to the Aug. 29th close of $17.83,” she wrote. “I suggest using a day that the Compensation Committee held a telephone call, either jointly or individually with the members.” I assume the SEC includes that detail because it believes Heinen made that suggestion so that the company could plausibly pretend that a board decision had already been reached on one of those dates.
On December 18, when Apple’s price was $21.01, the compensation committee and Jobs finally came to agreement on the vesting schedule, and the next day Levinson emailed the full board, cc-ing Heinen, explaining that the grant date would be October 19, when the price had been $18.30. (That corresponded to the date of one of the compensation committee calls.) Levinson wrote, “For the record, I informed Nancy [Heinen] in advance of our intentions and of the above specifics to be certain we were conforming to all legal requirements/guidelines.” This assurance, presumably, was sufficient to satisfy that SEC that all the other directors did not realize that anything improper was happening. (Levinson referred a request for comment to an Apple spokesman, who referred me to the SEC’s exoneration of Apple as a company, and its glowing endorsement of Apple’s cooperation in the its inquiry.)
In January 2002, Heinen allegedly had phony board minutes drawn up to reflect a “special meeting” on October 19, and saw to it that the August 29 board minutes (which had already been approved by the full board in November) were altered, with similar changes being made to the compensation committee minutes. (None of these alterations were cleared with the board, the SEC says.) Then she allegedly signed the phony minutes and an accompanying Corporate Secretary’s certificate, affixing the latter with the corporate seal and falsely attesting that the date was then November 2, 2001.
What do people think? Everyone happy with the It’s All Heinen’s Fault theory? Honestly, I don’t know anymore.
If the people in the compensation decision chain didn’t think they were doing anything wrong, why did they lie and lie and lie? Second, Board Members are supposed to have a clear understanding of what they are doing and the legal implications. Confusion is not a bona fide excuse, but rather an acknowledgement of incompetence or malfeasance. Your choice.
Steve’s activities deserve a detailed and objective investigation. Despite the fact that they may appear shady, he had every right to engage in financial shenanigans if they were legal under SEC regulations at the time. If however he was found to have broke the SEC regulations, he should be made to return his ill-gotteen ganes and give the rest of his wealth back to charity organizations such as the Salvation Army. I am glad to see such a fine and vigoros debate on this subject.
Paul Delacroix is right in all aspects of his response. And I note that based on Parloff’s snide innuendos against Jobs, he doesn’t only want to lay out the facts (which he does clearly and well), but he words it carefully enough so the reader will read in Jobs guilt when it’s not there.
Fred and Nancy had fiduciary responsibilities and did not properly exercise it. In addition, they both gained financially from backdating of the grant to themselves. And there is arguably evidence against both of them. Those are the only three reasons why the SEC is pursuing a case against them. Note Jobs did not gain from the grants.
But the SEC settled with Fred because it’s evidence of intent on his part is really flimsy, relying on his lack of confirming, rather than a specific act to defraud (and again backdating itself is not illegal). The evidence against Nancy is a bit more damning, as specific false documents were created, which Wendy Howell’s testimony corroborates.
This has nothing to do with stealing from investors, it has to with GAAP compliance. Backdating options is not per se illegal, and what occurred here is obviously due to protracted negotiations as to the value of the options compensation package. When the options would be deemed granted determines the value of the compensation. However, for reasons best known to herself, Heinen decided to fudge the books when there was no reason to do so. This is an example of an overzealous attorney overthinking the situation while still painting herself into a corner. It seems pretty clear that Jobs not being an accountant didn’t even attempt to understand the SEC rules, instead relying on what Anderson and Heinen tell him. I don’t think Jobs would even know which questions to ask to determine if these actions were above board. His interest would be limited to the bottom line: “How much and when do I get it? My $1.00 a year salary is stretched kinda thin this month.”
Sheesh. There was a months-long internal investigation, followed by a months-long SEC investigation, both consisting of depositions and interviews with not only Jobs but also the Apple board. The fallout is that the SEC feels two people who ultimately had the responsibility to report the back-dating correctly did not do so and that Apple itself is absolved. OK.
Then, one of the two — who has already settled his case with the SEC — has his lawyer spit out a one-page release that doesn’t really say anything, and yet the whole world acts as if the whole case is now solved! Wow. If only the SEC had known what was in this release. Obviously Anderson must have failed to mention it all when he was interviewed. Please.
Anderson’s statement not only lacks proof, but even if the conversations were taped it means nothing. Anderson has the responsibility here. He’s a child complaining to his parents that someone kind of said it was OK that he invade the cookie jar so it’s kind of sort of not really his fault even though he knows it is because it’s his responsibility which is why he copped a plea.
Months of investigation down the tubes because a bitter plea-bargainer has his lawyer spit out a simple statement that doesn’t even really make any accusations? Wow.
Justice could be served if everyone who profited from the options backdating were ordered to return their cash profits from the exercise of those options. 50% of that profit should be distributed to the shareholders, and 50% should go to the employees who are not eligible for options or grants….somebody has to go to jail…..
THERE IS A LAW ON THE BOOKS ENTITLED ‘UNJUST ENRICHMENT” …….It is common knowledge that GREED IS EPIDEMIC in the board rooms of america’s corporations…. it is incurable and contagious thru the Old Buddy Network …..you come on my board, and I will go on yours.
Greed is an aphrodisiac to the Directos .and …..Diogenies is still looking for that Honest man .
You have to love the Mac zealots in these comments that are putting words into other people’s mouths and generally defending Jobs with ridiculous comments ($1 salary means Job’s isnt’ greddy). Own AAPL stock much?
There are two kinds of people. Mac zealots and Mac haters. You Lisa are a Mac hater and I’m sure you would like to see Mr. Jobs go to jail for no crime being committed. That puts you into another category: PC weiner.
True, backdating options is not illegal.
True, it is the accounting for those options that becomes the issue.
However, be careful to say that only the CFO and Legal Counsel are responsible for the soundness of such reports. I would remind everyone of a little thing known affectionately as the “Sarbanes Oxley Act” which requires the CEO to certify that the financial statements are true and accurate, thus making him as liable as the CFO.
One might argue that Sox wasn’t signed until april ‘02, after the alleged backdating (barely). But that does not make Job less accountable for understanding the implications of his primary source of income.
Give it a rest about Jobs not gaining from the shady deals, so everything is all sunny and a-ok. If you steal something and it ends up being worthless, you are no less guilty of theft. Ineptness does not equate to innocence. Also, business success doesn’t mean it’s unthinkable that you are committing misdeeds. Mike Millkin was wildly successful. And don’t shed a tear for the dollar-a-year man who complains about his 7.5 million options. You realize that if the entire market doubles and Apple only goes up a dollar that means he’d get $7.5 million for seriously underperforming for the shareholders?
Multi-millionaires – even billionaires – can turn out to be the greediest of them all, eh? Someone to whom $10 million would not change their lifestyle steps over the line into the more-money-for-me-at-any-cost, even irregular arrangements, deserves to be punished and held high as an example.
You have to love the Mac zealots in these comments that are putting words into other people’s mouths and generally defending Jobs with ridiculous comments ($1 salary means Job’s isnt’ greddy). Own AAPL stock much?
Steve Jobs is a creative genius and the chief architect of Apple’s success. He has enriched the lives of every one who uses a personal computer or listens to digital music. He has done so, while working for a salary of $1.00 per year, thus his compensation, for all intents and purposes, has been completely performance based and tied to the rewards enjoyed by all Apple shareholders. From what I have read, Mr. Job’s actions in this whole matter of backdating of stock grants had the effect of substantially reducing the value of his grants. It is always tempting to throw stones at someone who is at the top of his game, the stone throwers’ motives in such cases are always suspect. While it is appears that some mistakes where made by underlings trying to achieve intended results that timely actions would have achieved anyway, that seems to me to be the limit of what went on at Apple. The time has come to shed the tabloid mentality that keeps stories like this alive and leave Steve Jobs and his brilliant band of innovators to the much more important work of bringing consumers like myself the next big thing…
I think the possibility exists that the backdating “oversight” is a testament to the general cluelessness of some parties involved or maybe that it was just deemed common practice in an era of growth and moreover a victimless crime. The fact that they were beneficiaries makes them worthy of scrutiny especially when shareholders have been bilked. Is it likely that the entire scandal was the responsibility of this one attorney? I personally doubt it. But I think the important lesson for those who invest in equities is caveat emptor. Why people cry foul when chasing high returns and fad sectors is beyond me.
What tends to get lost in all this hoorah about the Apple options problem is that Apple found this irregularity and reported it themselves to the SEC. It was not some investigation by the SEC or an auditor out on a witch hunt.
Another lost fact is that Steve Jobs did not gain from this grant, he never exercised those options.
In my experience CEOs know all the details about the pricing of their own options. If Mr. Jobs is uninformed about his option pricing then he must also be uninformed about ipods and computers too.
“For heaven’s sake people, success is not a crime nor is it immoral.”
Tell that to Bill Gates, Wal-Mart, McDonald’s and all the othe successful and powerful companies and individuals that the liberals hate.
If Jobs were working at Exxon and did this these people would be calling for his head.
Where do I begin with Tom’s comment? It’s misguided in every way. Jobs didn’t gain anything from any of the backdating that happened at Apple. And compensating the company’s CEO with stock options (backdated or not) that will only be worth a dime if the company performs is certainly not “stealing” from the shareholders — quite the opposite. It’s a protection of their investment. Furthermore, a man who only accepts a salary of $1 a year and accepts ALL of his compensation in performance-linked options granted years apart is CERTAINLY not an example of corporate greed. It’s an example of a person who believes in his company’s future and wants the public to know it. Again: exactly the opposite of the sort who bilks the shareholders.
And finally, backdating itself is not illegal (nor springloading, no matter how many times Mr. Parloff enjoys calling both of them ’shady’). What is illegal is not reporting them correctly. Note that this side of it (the illegal side) was not discussed in any of the emails exchanged with Jobs, so none of the people involved in those discussions can be said to be part of any “conspiracy”, unless you count a collaboration to deliver an optimal reward to a very high-perfoming CEO as a “conspiracy against the shareholders”, which the shareholders themselves will tell you is complete nonsense.
Fred Anderson claims that he told Steve Jobs that reporting requirements are that there be prior approval for the options that are being backdated, and Jobs responded that he felt there was, AND he REFERRED Anderson to the Board to verify it. These facts are in Mr. Anderson’s statement. Since Jobs almost certainly felt that the award would happen, and since he almost certainly had personal assurances that the award would happen, it is reasonable for him (a NON-accountant) to consider this to be the right answer to Fred’s question. His mentioning that the board would verify it is even further evidence that he did not actually suspect that they had not met the legal definition of ‘prior approval’ (again, a matter on which Jobs is not an expert and on which Anderson shouldn’t have expected him to be an expert).
It is job of the Board and the CEO to work out compensation. It is the job of the CFO and the General Counsel to advise them on whether reporting requirements are met. I would like to point out that NOWHERE does Mr. Anderson claim that he or Heinen advised Steve Jobs and the Board that the reporting requirements were not being met. Only this case, can the Board or Jobs be said to have acted knowingly against the law — and Anderson isn’t claiming this case.
The clear conclusion is that Anderson failed in his duty to dot the i’s and cross the t’s, and now seeks to smear someone who didn’t actually have that responsibility, and was likely far too busy to engage in legal verifications. A CEO needs to trust his advisors.
Editor,
It appears that some people want to make Steve Jobs into a criminal even though he is chiefly responsible for the resugence of Apple as a leading techological entity. Furthermore, backdating of options is not illegal. Until it is illegal, why pretend it is a crime? It is illegal to improperly account for the options grants. Some would calle it criminal of Jobs to negotiate with the board over timing. Again, this is not so. I own no Apple stock, am not a fan of Jobs, and wouldn’t own an ipod if it was given me. For heaven’s sake people, success is not a crime nor is it immoral.
an emailed comment posted on behalf of: Jack, Arizona
Steve Jobs saying he was not involved is insane. How can he not have understood the concept that giving someone something worth $2 for $1 would not have any accounting implications. His whole I didn’t know the accounting treatment either means he is an idiot (which I don’t think any of us believe) or was involved in the scheme.
The SEC isn’t out for justice – just a head. And one without political connections please. It is so inconvenient for them to have a situation where brilliant corporate leaders with strong ties in Washington commit fraud. So they conveniently rationalize that these corporate titans simply weren’t smart enough to understand what they were doing. We’re smart enough though. The SEC stands among the other frauds in this case.
Whoever is involved in, or is the knowing beneficiary of, the fraudalent backdating of options should be required to disgorge the proceeds of those options and/or go to jail.
It seems clear to me that there is rampant conspiring to commit fraud by practically all involved. Mr. Jobs appears to have been actively involved in the process and if Mrs. Heinen and Mr. Anderson are willing to point the finger and testify against him, then the SEC has a responsibility to punish him and the others. A scape goat is not what we need. Trusted company officials need to be held accountable if they are indeed “stealing” from the shareholders and investors of the companies that treat them so well to begin with. This is nothing more than corporate GREED and it needs to be stopped. It also seems highly unlikely that Mr. Jobs was in charge at Pixar when the same type of behavior was prevalent and he manages to be just a dimwit who had the most to gain? Please!
option backdating is not illegal. not accpunting for it properly is.
So even if jobvs backdated option. He’s not the one working on the balance sheet. You write the article to bring the stock down. This should be illegal.
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This blog is about legal issues that matter to business people, and it's geared for nonlawyers and lawyers alike. Roger Parloff is Fortune magazine's senior editor (legal affairs). He practiced law for five years in Manhattan before becoming a full-time journalist.
Wait… one woman, put her spuds on the grill, and tried to give everybody a whole bunch of money?
Is she suicidal? Do people do that? Just run around, and sneak back-dated options grants to their bosses?
Is that what they are asking me to believe?