We pointed out last week that Apple has admitted that Steve Jobs played a role in backdating stock options at the company that is very similar to that of CEOs who have been indicted on criminal charges. And, as it turns out, Holman Jenkins—one of the smartest business writers around—agrees with us. “All in all, [the Apple backdating case is] a fairly typical case of backdating judging by the two detailed indictments, of executives at Brocade and Comverse, issued so far.”
His longer description of the likely motives of Steve Jobs and Apple for backdating is worth reading.
"Backdating" has become the convenient formulation, but what we're really talking about is options granted "in the money." That is, the exercise price is lower than the market price, so the options appear to represent an instant accretion of wealth to the holder as long as the stock price holds up through the vesting period.
"Backdating" entered only as way to allow these options to receive the same preferential accounting treatment as "at the money" options.
Now if Apple's statement means anything, it means Mr. Jobs knew that selecting "favorable grant dates" allowed certain employees to receive "in the money" options. Let's not play dumb: He would have been the one deciding which employees got this benefit. Backdating, for all the confused huffing and puffing of the media, is not functionally different from grants of restricted stock -- and Mr. Jobs has shown himself a believer in such outright grants of incentive wealth: In 2004, he awarded four top executives (most likely the same ones who earlier received backdated options) restricted stock worth $25 million.
Mr. Jobs is not an accountant, but Apple's claim that he didn't understand the accounting implications of backdating should test our credulity for an obvious reason: Then why not just issue "in the money" options? Why adopt the baroque artifice of selecting a past date when the share price was lower?
Mr. Jobs clearly knew the purpose of selecting "favorable grant dates" was to produce "in the money" options. Is Apple simply saying he didn't understand that backdating was an improper way of making sure these options received the accounting treatment prescribed for "at the money" options? If so, his defense is the likely defense of several CEOs already in the dock. Luckily for him, we have signals from prosecutors that they intend to focus on "egregious" cases -- read "small companies without celebrity CEOs."
There’s another twist to this. The people who are arguably hurt by Apple’s backdating—who the SEC would be seeking to protect through a (highly unlikely) prosecution of Steve Jobs—would be the Apple shareholders. In theory, backdating deprived the Apple shareholders of material information about stock options grants at the company, making Apple’s compensation costs seem less than they otherwise would have been. But in reality, any move to prosecute Steve Jobs would be a possibly lethal blow to Apple’s share price.
A Typical Backdating Miscreant [Wall Street Journal]