And speaking of Steve Jobs…wait for it…backdating is back! As we mentioned this morning in the Opening Bell, the Wall Street Journal reported this morning that back in his Pixar days Steve Jobs had a role in negotiating a contract with film director John Lasseter that included stock options dated months before the contract negotiations even began. The news here is not the backdated stock options grant—those were acknowledged by Pixar-owner Disney months ago—but Steve Jobs role in the contracts. First Apple, now Pixar. This guy is starting too look like more than just a “typical backdatingmiscreant.” He’s practically the Typhoid Mary of backdating.
And look at how both Apple and Disney are trying to manage today’s news. Apple refers all inquiries to Disney on the grounds that Disney now owns Pixar. Disney refers all inquiries to Apple on the grounds that that’s where Jobs works these days. This kind of circular buck-passing can’t go on forever. Soon someone will have to announce that it’s all okay because Steve Jobs might have known about the options grants and the backdating but he didn’t know about the legal or accounting implications and so that makes it all okay. And that’s an idea that sounds pretty reasonable but vanishes in the presence of thought.
Did Jobs think that all this backdating going on around him was just because those dates were the birthdays of the accountants or something? What did he think was going on when the agreements he was negotiating for himself and Lasseter kept including options grant dates fixed at some point in the past?
We have no idea but we can take a guess. The advantage of fixing the date and therefore the price of the stock options was not that it let Jobs and other executives secretly steal money from the company or its investors. It’s that it let them negotiate other things, like price points, without worrying about getting screwed by day-to-day movements in the stock-prices.
Let’s go through this one more time. If we agree you should get $10 million in options today, and write that down at today’s numbers of 10,000 shares, but the price jumps 10% by the time we finalize the agreement, you either better be on the ball and make sure you are getting 11,000 shares or you’ll end up with less value than you negotiated for. If you’re a busy executive, or say a film-director, you probably are doing more important things than watching the day to day fluctuations of the stock price. So odds are you are going to get screwed.
But if we fix the options grant at a certain date in the past, everyone knows exactly how many options equals how many dollars. We can all move on to thinking about more important things. As it happens, many companies were under the impression that accounting rules allowed them to account for these as “at the money” if they pegged these to earlier dates with historically low share prices, even though they were in fact granted on dates when they were “in the money.” This turns out to have been wrong but it depends on an obscure, poorly understood and widely misunderstood, somewhat arbitrary accounting rule.
So here’s what the Apple-Pixar-Disney people should really say: This isn’t a bid deal. Not because Jobs was too ignorant to understand it, but because it just isn’t a big deal. We’ll fix the financial statements. But nothing criminal or fraudulent happened here. Time to move on. Have we mentioned we’re coming out with the iPhone?
Larry Ribstein wonders if this latest revelation will test the strength of the “Apple Rule”—which holds that scandalous misdeeds by popular CEOs are neither scandalous nor misdeeds. He concludes with the most pertinent question:
Now we have both Jobs and Lasseter, and possibly Michael Dell. So are we going to lock up America’s most popular entrepreneurs, make untenable distinctions in who gets prosecuted, or finally understand that the criminal justice system is a wildly inappropriate way to deal with agency costs like those involved in backdating?
Who knew yesterday’s Warner Music Group conference call was going to be so entertaining? We sure didn’t. If we had even suspected it, we might have made Bess listen to it. Or maybe even asked Keith to put aside his China research for a moment and pay attention to something happening in the English speaking world.
The fun part came when Edgar Bronfman responded to recent musings of Apple’s Steve Jobs about why music wants to be free.
“The notion that music does not deserve the same protections as software, television, films, video games, or other intellectual property, simply because there is an unprotected legacy product available in the physical world is completely without logic or merit.”
The New York Post provides a good backgrounder ‘graph on how Jobs’ pissed off the music people.
Jobs’ essay, “Thoughts on Music,” is viewed throughout the music industry as a self-serving attempt to deflect attention away from recent rulings in Europe to loosen up restrictions on iTunes’ proprietary system.
Translation: We’ll start giving our stuff away, Steve, when you start giving yours away. Until then, shut the hell up and let us run our business while you run yours.
Upshot: No more backstage passes for Steve!
Bronfman Rips Jobs [New York Post]
Roger Ehrenberg has an exhaustive (and exhausting to read, because we don’t function before 8 am, though job constraints dictate otherwise) analysis on the debut of the Vista and, moreover, the Bill Gates-Steve Jobs celebrity death match ’07. Seems, in spite of questionable business ethics, Mock Turtleneck is beating Four-Eyes by a landslide. Why? Because Steve Jobs is young, fun, and marketable to law abiding and non-abiding citizens alike. Whereas Bill is behind the times, transparently resentful, and cranky (RE likens him to Glenn Close in Fatal Attraction, which we kind of get but don’t think is the part Bill’s playing so much as Jennifer Jason Leigh’s a la SWF). Take, for instance, last week’s interview with NewsWeek:
There’s admittedly been a lot of backdating talk around these parts of late (and mostly of the will they/won’t they Steve Jobs sort). Backdating this. Backdating that. Carney, Larry Ribstein, and Holman Jenkins (of the eponymous “Backdating Dissident Crew”) think Jobs has done nothing wrong. Everyone besides Carney, Ribstein, and Jenkins wants Jobs to fry. Jobs considers any attempt to take him down (and, perhaps more importantly, John Hodgman) an act of war. And so on and so forth. We were going to issue a fatwa on writing anything else about the aforementioned but that went to hell when we realized this damn thing just won’t die. But just so you know, we do feel bad about forcing you to ride what we regard as a dead horse with us. Anyway, today Fortune’s Roger Parloff writes about former Apple chief financial officer Fred D. Anderson and former general counsel and corporate secretary Nancy R. Heinen, (who was also Jobs’ general counsel at Next). Mere clogs in the machine right? Wrong, apparently. Anderson and Heinen are the two former officers that the results of Apple’s own internal investigation flagged as having “serious concerns regarding [their] actions.” More importantly, they may be evidence of Jobs’s wrongdoing.
Though most investors dearly hope the company’s conclusion [of “no misconduct by current management”] holds up, many can’t quite suspend disbelief. “The idea that Nancy or Fred would’ve acted independently of the biggest control freak in the entire tech industry is laugh-out-loud funny,” says one big Silicon Valley player.
Lawyers for Heinen and Anderson have issued statements “vigorously denying” any illegal behavior, and Mark Pomerantz has been hired by Jobs, though neither he nor Apple would confirm this. This “they couldn’t have acted without Jobs” theory may actually be kind of a tough one for the big guy to sort out, in regards to which story he should go with. Either Jobs acted with Heinen and Anderson, and, therefore, did something kind of illegalish, or they did it all by themselves, WITHOUT The Most Powerful And Influential Man On Earth (because of him you can watch “The Office” on your phone for god’s sake!), and he’s actually just a big puss. Apple’s Jobs could face uphill court battle [Fortune]
The early reactions to news that federal authorities are probing the backdated stock option grants to Apple CEO Steve Jobs are coming in. Not surprisingly, the best reactions are coming from the Backdating Dissident Crew (which now includes Jobs himself). Larry Ribstein at Ideoblog makes the point that no-one negotiating their salary really gives a damn about when a stock option was priced. They care about what you’d care about: that you know the value of the grant and that no-one is going to game the grant by handing the options to you on a high-water stock price date. If you agree on the date of the past, you can understand exactly what the grant is worth. What Steve Jobs cared about was how much it was worth to him. This is an important point that bears repeating: it’s the level of compensation that an employee or an executive cares about. As in, “Show me the money!”
In the typical backdating situation (and there may be some cases of more serious abuse—the things that allegedly went on at Comverse seem far fishier than the typical backdating case), fiddling around with the grant date was not a way for employees or executives underhandedly inflate their compensation. It was an attempt by company to compensate its employees while avoiding having to expense the grant as an “in the money” option. This violated accounting rules (rules by the way that many people seem not to have understood very well) but, well, let’s let Larry ask the appropriate question:
My question: is this really the stuff of a criminal investigation? Which bad result are the screeching journalists and executive compensation moralists going to make us live with: trashing the career of one of the country’s most successful business executives? Letting him walk and ruining the life of a young lawyer who found herself in the middle? Or letting Apple off the hook because it’s successful and the journalists all have iPods, but sending backdaters at lesser companies to jail?
And over at Houston’s Clear Thinkers, Tom Kirkendalldraws a comparison between the abusive, malicious and absolutely evil prosecution of the Duke lacrosse team with the mob mentality that seems to have arisen in the immediate wake of the first backdating revelations:
In the Duke lacrosse team case, it is particularly ironic that many in the media and on Duke’s faculty were enablers of abusive, dishonest law enforcement and prosecution tactics that are far more often used in cases against minorities that those enablers would decry. They now share responsibility for the continued use of such tactics long after the spotlight on the Duke lacrosse team case has moved on to the next fixation of the mob.
Here’s CNBC’s sit down with Apple CEO Steve Jobs. There’s lots of talk about the iPhone, of course. But in the final minutes (at around the 5:15 mark in this clip), they ask him about backdating. Jobs actually seems to agree with DealBreaker, Larry Ribstein, Holman Jenkins and the rest of the Backdating Dissident Crew that the press coverage of backdating has been way off base. And, for you all you nervous Apple investors, Jobs tells CNBC “I don’t think it will affect current management.”
The recent disclosures about backdating at Apple and the receipt by Steve Jobs of backdated options grants seems to have created an entirely new line of legal defense: if Steve Jobs did it, it can’t be so bad. And, as we’ve discussed at length, it’s probably not a bad thing if Jobs role in backdating helps the public understand move away from the impression that backdating is akin the embezzling. Yesterday’s Wall Street Journal editorial page ran a story by two Skadden Arps lawyers representing the former CEO and chairman of Brocade Communications attempting to piggyback on Jobs popularity to exonerate their client.
Steve Jobs recently became the latest chief executive thrown into the options-timing imbroglio. Apple disclosed that its CEO was “aware or recommended” favorable grant dates on option grants to employees, but that he did not “receive or benefit” from any of the grants or “appreciate the accounting implications.” Apple’s board concluded that Mr. Jobs had done nothing wrong, and emphasized its “complete confidence” in its CEO. The markets followed suit. Rather than fret, investors actually bid up Apple’s stock by more than $5 per share.
Given the stock bump, the board’s exoneration and Mr. Jobs’s lack of accounting experience, could this possibly be a case of criminal securities fraud? Believe it or not, in the minds of some prosecutors applying a far-reaching and unproven theory of fraud, it is. Just last summer, the government indicted Gregory Reyes, the former CEO of Brocade Communications, despite the fact that Mr. Reyes, like Mr. Jobs, was a non-accountant who didn’t personally benefit one cent from the option grants at issue.
The problem with the government’s theory is that it conflates books-and-records violations with criminal securities fraud. In the process, the government untethers securities fraud from the legal elements that help safeguard executives from conviction for inadvertent accounting violations resulting in little or no harm to companies or to investors.
One irony of this line of reasoning is that it might work the other way around. It may increase pressure on the SEC to bring charges against Jobs in order to demonstrate that “Jobs did it” is not a workable defense.
[Disclosure note: John Carney formerly worked for Skadden.] Should Steve Jobs Go To Jail [Wall Street Journal]
We warned you today was going to be a big day in backdating coverage. Here’s a bit more.
Yesterday we speculated that one probable effect of yesterday’s iPhone announcement from Steve Jobs would be to divert attention away from backdating at Apple and the backdated stock options Jobs received. Today’s news coverage pretty much bears this out. In fact, Peter Cohan at Blogging Stocks even goes so far as to criticize the Wall Street Journal for not paying enough attention to the iPhone and its implications because the “editorial page editors’ rage at Al Gore and Steve Jobs kept that from happening.”
So how did the major business newswires and dailies handle the iPhone versus backdating stories? After the jump, a quick rundown of how the news sections (leaving out the editorial pages) dealt with the Apple story.
Holman Jenkins has been at the forefront of clearing up the cacophony of confusions that pass for commentary on backdating. This morning’s column distinguishes itself in clearing up a great many of the wrong-headed ideas about backdated stock options, and points the finger squarely at the financial press for doing such a poor job of explaining them. But it also makes a point of emphasizing how truly odd it is that one of the foremost defenders of Apple CEO Steve Jobs is Al Gore.
Blessed is the editor who can say to a writer, “Make sense of Subject X for me,” and hope to receive back something more than a distillation of tropes already in the media. Most editors are not so blessed, a factor just now reaching critical mass. On Sunday, a lagging commentator in the New York Times likened backdating to “getting to pick lottery numbers after the winning numbers are drawn.” A confused Washington Post editorial called on Mr. Jobs to reimburse Apple for the compensation he stole.
Against this (who would have thunk it) stands Mr. Gore, yelling stop to the lynch mob. In Apple’s own backyard, the San Jose Mercury News delivered a critic’s delectable complaint that the Gore investigation had “tried to preserve the company’s No. 1 asset” in Mr. Jobs. Isn’t that exactly what a shareholder wants from the Apple board right now? The Apple case is a marvelous example of why corporate governance reformers do shareholders no favor even as they expand their own bailiwicks by making governance reform a never-ending end in itself. Indeed, Mr. Gore deserves credit for putting himself in the line of fire at all. And worse is surely coming: Mr. Jobs is starting to face insinuations of insider trading for stock sales after the first backdating cases broke but before Apple was implicated.
Oh, and yeah, somewhere in there he makes a nice mention of DealBreaker‘s coverage. So, you know, “big ups” to the Holman. Apple’s Gore [Wall Street Journal]
There’s a host of good backdating stories out today. So many it’s almost hard to know where to start. Let’s begin with Larry Ribestein’s explanation of how Apple and Steve Jobs might actually help regulators, the media and the public think more clearly about the so-called “scandal.”
Backdating is not a business scandal. It is a scandal of credulous (or worse) business journalism. It is a story about how journalists have been willing to whip the public into seething resentment against corporate malefactors, while paying little attention to the actual real world consequences and implications of the practice it was reporting. Backdating may not have been totally innocuous (I never said it was), but that doesn’t exonerate the journalists from telling both sides. Apple has brought us at least a little closer to the light at the end of this depressing tunnel.
As it turns out, Microsoft is totally prepared to compete with the new product from Apple. No. Really. Here’s “Bill Gates” on the mPhone:
For the past twenty years, Microsoft has been working on something called the mPhone. I know how similar the names look, but we came up with ours first and you pronounce them completely differently. You don’t say m-Phone like you’re some idiot third grader taking a spelling exam. It’s “maphown.” You try to say it like it’s one syllable, even though it’s kinda two. Let’s call it one and a half. It’s this kind of outside-the-box thinking that made me the richest man in the world. Oh you know what? I think I’m going to capitalize the N, and say it stands for “new”.