The force field that seems to have protected Steve Jobs from the harsh scrutiny that the press and regulators have applied to other executives allegedly involved in stock options backdating is being put to the test today. The Securities and Exchange Commission filed charges against two former Apple executives—former chief financial officer Fred Anderson and former general counsel Nancy Heinen. And one of them has reacted by pointing an accusatory finger at the man at the top of the Apple.
Each of the two formers have reacted very differently to the charges. Heinen has vowed to fight the backdating charges, joining the thin ranks of other corporate executives who have decided to fight the SEC rather than settle. Anderson is going the other way. The announcement of his settlement with the SEC was made right after the charges were filed. But Anderson didn’t just settle—he released a statement placing the blame for the backdating of stock options at Apple squarely on the shoulders of chief executive Steve Jobs.
The statement shreds one of Jobs strongest lines of defense—that he didn’t understand the accounting implications of changing the options grant dates. Anderson’s statement has Steve Jobs as the key actor at each of the critical points. It sounds as if the ‘Apple Rule’—the unwritten rule protecting high-profile, popular executives (but not unpopular executives or formers) that regulators, prosecutors and the press seem to follow on backdating—is about to take a pounding.
The stock is trading up on the news—perhaps under the impression that the Apple Rule will continue to protect Jobs—but the reactions from the press and online media have been swift and punishing.
ValleyWag predicts that Jobs may face charges, going so far as to announce that its editor has sold out his position.
“Disclosure. I just sold all my Apple stock, before writing this post. (The stock is soaring, but I can’t believe traders have properly digested the news.) Steve Jobs, the company’s hugely valuable chief executive, must now be squarely in the sights of securities regulators,” ValleyWag says.
Endgadget also smells blood in the waters of Cupertino, where Apple’s headquarters is located. “The tech exec superstar who’s largely gotten off clean despite Apple’s lingering backdated stock options scandal is now being publicly blamed for wrongdoings by former Apple CFO Fred Anderson,” Endgaget writes.
Perhaps the most surprising reaction comes from Business 2.0’s blog, which examines how Jobs and Anderson dealt with their backdated stock options and concludes that the difference proves that Anderson is financially much smarter than Jobs. Anderson reportedly made as much as $3.5 million on his backdated stock options—an amount he has now agreed to “disgorge” (read: fork-over) to the government—while Jobs exchanged his backdated stock options for restricted shares. Jobs trade means he missed out on a $3.6 billion gain.
Oddly enough, that financially unsound decision may be what keeps Jobs out of trouble on backdating. He can credibly claim that he did not profit from the backdated stock options since he never cashed them in. But prosecutors and regulators have already shown a willingness to bring charges in other cases where executives did not personally see profits from backdating, so this might not be enough to keep the Apple Rule intact.
SEC files charges against 2 former Apple officers over options [Associated Press in the International Herald Tribune]
Former Apple CFO settles with SEC [Reuters]
Former CFO blames Jobs for backdated options grant [San Jose Mercury News]
Ex-CFO says Jobs was warned of options dates [Market Watch]
Attorney for Fred Anderson Issues Statement Regarding Settlement of Claims with the SEC [Press Release via Business Wire]
Steve Jobs in regulators’ sights [ValleyWag]
Former Apple CFO publicly blames Jobs for stock options scandal [Endgadget]
Why Fred Anderson Is Smarter Than Steve Jobs [Business 2.0]
Earlier on DealBreaker: Backdating and Apple stories from the DealBreaker Archives.
Apple
- Posted in:
Apple
Breaking: Apple Backdating Charges, A Settlement And The ‘Apple Rule’ Put To The Test
By John Carney- Posted in:
Apple
So Now We Know What The Backdating Scandal Is All About: Screwing the Corporate Henchmen
By John Carney
Yesterday federal prosecutors announced the indictment of Kent Roberts, McAfee’s former general counsel, for backdating related charges. Today’s Wall Street Journal points out that former McAfee CEO George Samenuk knew about some date gamesmanship with one of his stock options grant, as well. So why wasn’t he indicted?
Larry Ribstein—who coined the “Apple Rule”—wonders if there isn’t some invisible federal law enforcement rule protecting sitting corporate chief’s from getting indicted so long as they don’t actually have backdating ink-stains on their hands.
The bottom line seems to be that the Apple Rule protects an executive who lets an underling do the messy backdating, even if the executive knows about it. While Samenuk isn’t a popular well-known executive like Jobs, we need to have an “indirect Apple rule” for executives whose indictment would set an unpleasant precedent for an executive who is protected by the “direct Apple rule.”
In the end I expect that the biggest mess left by the backdating “scandal” will be a widespread perception of unfairness in the criminal justice system.
But clearly the “indirect Apple Rule” isn’t quite as strong as the “direct Apple rule”–Samenuk was forced to resign last year when backdating at McAfee came to light.
SEC Details McAfee Plan For Options [$$] [Wall Street Journal]
http://busmovie.typepad.com/ideoblog/2007/03/mcafee_and_the_.html [Ideoblog]
- Posted in:
Apple
Another Backdating Indictment: McAfee’s Former General Counsel Charged
By John Carney
The former general counsel of McAffee yesterday became the eleventh person charged with criminal offenses related to stock-options backdating. The feds have said they are examining some 140 companies for backdating but its not hard to see why McAffee’s former general counsel ended up high on its lists for criminal indictments.
First, McAffee was an early and somewhat easy target for the feds because the company has had to restated its financial results five times in the past five years. The company faced securities fraud charges in connection with an alleged scheme to overstate revenue from 1998 to 2000. It settled with the authorities by agreeing to pay a $50 million civil penalty, but neither admitted nor denied any wrong-doing. It’s former controller, however, pleaded guilty to one count of securities fraud.
Kent Roberts, the indicted former general counsel, allegedly manipulated his own stock options grant date, as well as that of his chief executive. He then allegedly turned around and fired the controller for manipulating stock options grant dates. Nasty. His indictment has been expected for at least two weeks now.
Roberts seemed to have tripped the self-dealing alert that we’ve seen in other backdating indictments, and engaged in some corporate backstabbing that makes him hardly a sympathetic character. Here are the details on the indictment from the Wall Street Journal:
According to a seven-count indictment returned by a federal grand jury in San Francisco, Mr. Roberts in late 2000 became dismayed that an option grant made to him earlier that year was “underwater” — that is, its exercise price of $29.62 was higher than the stock’s price at the time. An option can only be cashed out for profit if the exercise price is below the open-market price of the stock.
According to the indictment, Mr. Roberts directed the company’s then-controller, Terry W. Davis, to change the grant’s record so it appeared to have been granted April 14, 2000, a day the stock fell to $19.75. That immediately made his grant more valuable, though he never later cashed out any of the options for a profit.
Mr. Roberts got Mr. Davis pushed out of his job, the indictment says. In 2002, Mr. Roberts headed an internal probe of irregularities at McAfee, which was then known as Network Associates Inc. Upon learning that Mr. Davis, who wasn’t identified by name in the indictment, had among other things lowered the exercise price on some other options, Mr. Roberts recommended that he be removed from his finance-department position, the indictment said. It added that Mr. Roberts didn’t tell internal auditors or the SEC that Mr. Davis had manipulated Mr. Roberts’s own grant.
It’s notable that the prosecutors seem to have concluded that the self-dealing trigger was pulled when Robert’s manipulated his own grant even though he never cashed out the backdated options. This is important because the “no gain from backdating” has become a major line of defense for some corporate executives, including Apple chief Steve Jobs. So the question remains: will the feds indict Jobs or will the “Apple Rule” continue to protect him? (More on the “Apple Rule” from the man who coined the term here)
McAfee’s Ex-Counsel Is Charged With Options Fraud [$$] [Wall Street Journal]
McAfee Ex-GC Indictment [pdf file via WSJ Law Blog]
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 backdating miscreant.” 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?
Pixar Pay Package to Lasseter Included Well-Timed Options [Wall Street Journal]
The Apple rule gets a workout[Ideoblog]
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:
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Apple
The New York City Employees’ Retirement System Thinks Jobs Blows (If We Have To Make Mountains Out Of Molehills We Will Do It And You Will Like It)
By Bess LevinThe Steve Jobs/backdating thing held our interest for a while but ultimately tapered off because of the all talk, no action nature of the whole situation. Yes, we get that it’s hard to take (literal) shots at the man who brought us the singular sensation that is the PC half of the “I’m A MAC, I’m a PC” commercials but come on—don’t get us all excited with your verbal assaults for nothing. So we were pretty happy to read that The New York City Employees’ Retirement System will be the lead plaintiff in a shareholder suit against Apple, brought to you by the fund’s law firm, Grant & Eisenhofer. The NYC fund was selected by Judge Jeremy Fogel, of the U.S. District Court for the Northern District of California, late last Friday. The fund owns about 1 million shares of Apple (approximately $87 million).
New York pension fund takes lead in Apple lawsuit [Reuters via ZDNet via Daily Intel]
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