Apple is one of many companies facing federal scrutiny for backdating stock options.
The Securities and Exchange Commission (”SEC”) has filed civil fraud charges against Nancy Heinen, Apple Inc.’s former general counsel, over her alleged role in the company’s stock options backdating scandal. Backdating stock options is the practice of setting the grant date of a stock option to an earlier date when the company’s stock price is lower so that the recipient receives a larger windfall should they exercise the stock option. Specifically, the SEC’s suit alleges fraud in connection with two options grants.
Ms. Heinen would be the first Apple executive to face legal action since the company acknowledged that it had backdated stock options grants. Other former Apple employees are being investigated as well, but it is unclear whether they will be charged. One former employee being scrutinized, former Chief Financial Officer Fred Anderson, has previously denied knowingly participating in any manipulation of the options awards. Even so, the manipulation itself is not necessarily illegal but it must be accompanied by proper disclosure to avoid legal violations, otherwise it could lead to inflated corporate profits and underpayments in taxes.
Ms. Heinen’s counsel maintains that this is not a backdating case, but one in which the grant dates were moved to later dates at higher prices. Indeed, she claims that the key grants in question were approved by Apple’s board of directors and that Apple complied with securities laws applicable at the time, which allowed stock options to be pegged to the dates when the company first knows who would be getting the stock options.
In the October 2001, Apple granted options to CEO Steve Jobs, which the board had first approved in August, but negotiations dragged out and the options package was not finalized until December. Apple’s stock price was higher in October than in August, but still lower than in December. A similar pattern allegedly occurred for the January 2001 grant to other members of the executive team.
At the time of these grants, Apple’s accounting policies did not prohibit moving the grant date to a later date and higher price. And Apple’s own internal probe cleared current officers of misconduct but pointed to “serious concerns” about the actions of two unnamed former employees, widely believed to be Heinen and Anderson.
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