The SEC will not bring charges against Apple (AAPL) over its options backdating imbroglio, and it looks like Steve Jobs may slip through unscathed. (He's so wily, that Steve Jobs). The SEC, though, did charge two former Apple executives. One, former CFO Fred Anderson, settled for a $150,000 fine and a $3.5 million disgorgement of illicit gains from the backdating of his own options. The other, former general counsel Nancy Heinen, is fighting the charges.
In a statement, Anderson explicitly points the blame at Jobs, asserting that he warned Jobs of problems with the backdating, but went ahead and approved them anyway when Jobs assured him the board had signed off on the action. But it wasn't so simple. If anyone needs more evidence why backdating is a bad idea, read this account of the SEC lawsuit by the NYT:
While Apple finalized the terms of the 4.8 million option grant in February 2001, when its shares were trading at nearly $21, the complaint says, Ms. Heinen caused Apple to backdate the grant to Jan. 17, when Apple’s share price was $16.81.
In the complaint, the S.E.C. asserts that on Jan. 30, Ms. Heinen provided Mr. Jobs with a list of daily closing share prices earlier in the month, when Apple’s share price was lower. The particular dates were selected, an e-mail message sent by Ms. Heinen said, to “avoid any perception the board was acting inappropriately for insiders prior to Macworld,” a trade show in early January at which the announcement of the iPod caused the stock to rise.
Even as Apple execs were trying to avoid one impropriety (backdating the options before Macworld, when the stock was even lower), they got themselves into another one by not handling the paperwork properly. Then there was this cover up associated with a separate set of options for Steve Jobs himself:
On Dec. 18, 2001, a day the stock closed at $21.01, Mr. Jobs and the compensation committee came to an agreement: the date of the 7.5 million-option grant would be Oct. 19, 2001, with an exercise price of $18.30.
To cover up the backdated grant, the complaint asserts, Ms. Heinen directed her staff in January 2002 to document “a phony special meeting” of Apple’s board at which all directors except Mr. Jobs had met to discuss his pay on Oct. 19, 2001. In fact, no meeting had occurred.
This whole mess comes down to accounting and disclosure. Apple was negotiating compensation with its top executives, and tying their options to dates that had already passed. The lesson here is if you are going to grant stock options, don't make them retroactive because you are just going to wind up creating a tortuous situation that will be difficult to explain. Apple would have done better to take a lesson from its product design team: keep it simple.
Ms. Heinen denies any wrongdoing. And Jobs, of course, later swapped those options for restricted stock, the accounting of which is not in question.
Update: Here's B2 Beta's liveblog of the conference call.