The U.S. Securities and Exchange Commission (SEC) has accused two former Apple executives in two instances of illegal stock option backdating that Apple had previously disclosed after an internal investigation (see “Apple Releases Stock Option Backdating Report,” 2007-01-08). Nancy Heinen, former general counsel of the company, was charged with improper actions in two sets of options grants and in altering company records to conceal what the SEC alleges was fraud. The full complaint is available as a PDF.
Former chief financial officer Fred Anderson was separately charged with failure to ensure that Apple’s financial statements were correct through a lack of observation in the first of those two sets of options grants. In that first set of grants, Heinen, Anderson, and four other executives benefited. In the second, only Steve Jobs stood to gain.
Anderson immediately settled the charges without “admitting or denying the allegations,” an approach the SEC allows when the agency perceives public interests are served by closing the affair instead of proving guilt or losing a case. Anderson will give up nearly $3 million in stock option gains and nearly $700,000 in interest and penalties.
Stock options convey the privilege, but not requirement, to purchase stock at a given price. Money is made by exercising the options (purchasing them) and then selling when the options’ price is below the current market price of the stock. Options often come with a restriction on how soon the underlying stock may be purchased.
In stock-option backdating, the date on which the option is granted does not reflect an actual board meeting or other event at which an option is granted. Rather, the option is set to a preferentially cheaper price by choosing a date on which the stock is cheaper than on the substituted option grant date, putting options immediately “in the money.”
Backdating is legal if acknowledged with proper record keeping, including financial charges that result from what is essentially a company gift of additional money captured from the stock market. The SEC stated that nearly $40 million in expense was improperly excluded from Apple’s regulatory filings.
Apple earlier found several instances of backdating, but cleared current management, including CEO Steve Jobs. The SEC said Apple cooperated in the investigation, and it has no plans to charge the company. Other charges against individuals could still come, including Jobs and other members of current management.
Following the SEC’s press release, Anderson’s attorney released a statement in which the attorney said Anderson informed Jobs about potential accounting charges required for one of two grants to Jobs that were later canceled and replaced with grants of stock that required no exercise. Anderson’s attorney said, in brief, that statements made to Anderson turned out to be false, although the attorney doesn’t state it so bluntly. (So much for “neither admitted nor denied” the charges.)
Apple’s board of directors, excluding chairman Jobs, released a statement the day after Anderson’s, expressing full confidence in the company’s own investigation and in Jobs.
While Anderson settled the charges, it’s unclear precisely why, and the release doesn’t explain his decision. It’s easy to speculate that in Anderson’s current role – alongside U2’s Bono! – as a founder and director of investment firm Elevation Partners, protracted litigation would have been expensive and a distraction from his other duties. In the settlement, Anderson admitted no guilt, and can continue to serve as an officer and director of public firms. He sits on the board of eBay.
The Associated Press says that Heinen will contest the charges.