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]
Totally terrifying thought. But not beyond the range of the barely credible. We’ve written a lot about SEC regulation. And sometimes it did seem as if the SEC was listening. After we celebrated the court decision striking down regulations requiring hedge fund registration, and decried the possibility of an SEC appeal or new regulations trying to get around the decision, the SEC totally decided that it was just going to start studying hedge funds, impose some tighter investor requirements and not go all registration crazy again. Backdating? Well, after we started pointing out that a lot of the backdating “scandal” was a lot less scandalous than it seemed, the SEC’s prosecutorial zeal seemed to slacken.
So, post hoc, ergo hoc? Yeah, probably not. But according to Reuters, SEC chairman Chris Cox is reading blogs and using them to figure out what the public is thinking.
The chairman of the U.S. Securities and Exchange Commission, a technology cheerleader who recently posted on a corporate blog, said on Monday that he uses blogs to gauge public reaction on securities issues.
Christopher Cox, speaking at the Reuters Regulation Summit in Washington, also said the commission will be looking further at what corporate Internet posts might constitute public disclosure.
Cox has been an outspoken proponent on using technology to improve company transparency and investor education, especially pushing to make SEC filings rich with interactive data.
But he also uses technology to get an early peek at how the public will react to SEC action on issues.
Not too be too cynical about it, but are we the only ones wondering if it was just a coincidence that the report on backdating at Apple, and Steve Jobs role in it, came out just a few days before the conference where Jobs announced the headline grabbing Iphone?
Still, it seems that even this, uhm, well-timed announcement hasn’t completely drowned out the critics of Jobs. Daniel Gross takes note of the disparity between the way many CEOs have been treated after revelations that they received backdated options grants and Apple’s exoneration of it’s CEO.
So let’s review. Jobs recommended some backdating dates for other employees. He received a massive grant that was approved at a phantom board meeting, though he didn’t know about the phony meeting. And he never cashed in those options because they were replaced in 2003 by a grant of restricted stock.
CEOs at other companies have been forced to resign for such activities. So why is Jobs getting off so easy? His job may be saved by the fact that he did not directly profit. More likely, though, he’s been saved by his special status. Jobs is Michael Jordan in the 1990s, Citigroup in the 1980s, Walter Cronkite in the 1960s. He’s a revered Hall of Famer who doesn’t get whistled for fouls that send other pros to the bench.
Jobs is too big to fail. He is too popular—among investors, journalists, employees, analysts, and in the culture at large—for anyone to recommend that he be deposed.
There’s a strange smell coming from the New York Times today—and we don’t mean that ikcy gas smell that has blanketed Manhattan. We mean the smell of Ben Stein’s Sunday New York Times business section column. Ben, who used to write sensibly about public affairs, has lately become a sort of booboisie populist, coming out for a ban on management buyouts and foaming at the mouth when he tries to say anything about stock-option backdating. Yesterday’s column was no different. If fact, it stunk worse than usual.
After comparing Steve Jobs to infamous bankrobber John Dillinger for his role in backdating at Apple, Stein goes absolutely bananas in describing the Sarbanes-Oxley reforms recommended by the Paulson committee on capital markets.
In particular, Sarbanes-Oxley was supposedly too strict in requiring audits of internal controls. This was supposedly a painful, unnecessary burden in a world where a corporate boss’s word is his bond and the word of any corporate boss is worth more than all the bonds in Christendom. And the Sarbanes-Oxley section on internal controls was supposedly cruelly tormenting Wall Street to the detriment of the whole world of decent people.
But hold on. Isn’t backdating precisely an example of a failure of internal controls? Haven’t we just found out that internal controls are far too lax, not too strict? For the Paulson committee to say that we need less stringency in corporate audits is a bit like the War Department saying we needed less watchfulness at our naval bases after Dec. 7, 1941. It’s also a bit like Willie Sutton saying it would be good as a matter of national financial policy to have fewer guards at banks.
Okay. Look. We need to address this directly to Ben. Are you listening, Ben? Good. Here’s the thing. It’s as if the bombing of Pearl Harbor happened, and yet not one ship sank. How is Apple doing after it’s “Day of Infamy”—after it reported backdating? Just fine, thanks. In fact, shareholders seem mostly relieved that no one is seriously calling for Steve Jobs to step down. That is, most of the costs of backdating seem to spring from the “scandal” and not the underlying pricing of options. So, Ben, it’s probably time to step down. Pearl Harbor was followed by a huge war in the Pacific that only ended when we erased a couple of Japanese cities—along with the people who populated them—from the map. Is this really the model you want to use for corporate governance?
Apple doesn’t want you to pay any attention to the man behind the backdating curtain. You know, the man named Steve Jobs. And the adoring business media—otherwise frothing with outrage over executive compensation and the backdating “scandal”—have pretty much danced liked dervishes to Apple’s spin. Thankfully we have the (newly minature) Wall Street Journal’s Holman Jenkins to once again point out that Jobs is pretty much “a typical miscreant” when it comes to backdating. It isn’t that jobs wasn’t involved in scandalous backdating, it’s that most of this backdating business isn’t really so much of a scandal at all.
The markets have finally had their say about the wonderfully overblown backdating scandal. When Apple filed its latest mea culpa on Friday along with a board expression of confidence in Steve Jobs’s leadership, the company’s shares jumped four bucks. Message: The market doesn’t give a hoot about backdating. It gives a hoot whether Mr. Jobs might be run out of his job.
This ought to cast a light on whether the drop in market prices of companies in the backdating scandal reflects the shock and horror of investors at the details of backdating — or shock and horror at the meal that trial lawyers, prosecutors and the media are making of companies caught up in this episode…
Backdating, let’s recall, was simply an artifice to allow companies to issue “in the money” options (the terms of which were accurately reported to shareholders) without taking an accounting expense. That’s all backdating is. Does it matter in the teensiest whether options are expensed? No, expensing has no probative value whatsoever for evaluating a company’s shares or its compensation policies. Expensing creates a junk number, of zero analytical value.