Wednesday, April 25, 2007

The Apple GC, Speech Acts, and the Backdated Options

Posted by Jeff Lipshaw

There is a fascinating linguistic issue at work in the civil complaint just filed by the SEC against Nancy Heinen and Fred Anderson, the former general counsel and chief financial officer, respectively, of Seal Apple, Inc. arising out of allegedly backdated options, which is a hot news story today.  I'm going to assume the allegations to be true for purposes of some observations as to what I would call standard practice, but not necessarily of legal liability.

1.  The hair on the back of my neck certainly went up when I read the allegations that Heinen had "altered company records" (Paragraph 1),  and "fabricated or falsified" company records, "including the creation of minutes for a non-existent Board of Directors meeting" (Paragraph 2).  So I flipped the pages looking for the particulars.

2.  The complaint is about two different grants.  The first was to the Apple Executive Team.  There is no question under these allegations that the selection of a January 17, 2001 date was backward-looking and designed to find a day that had a low closing price, but that would also fall on a day after some recent public announcements that might have raised an inside information issue.  But interestingly, on this one, I cannot find an allegation of a falsely dated document.  First, the complaint leaves out any allegation as to the dates on the actual grant document, simply referring to it as "option grant paperwork" that was undertaken in February.  Second, and more significantly, the complaint alleges that on February 1, 2001, "Heinen began the process of preparing false paperwork to submit to Apple's Board of Directors so that it could authorize the grant."  The very next allegation says that she directed the preparation of a "Unanimous Written Consent" with an effective date of January 17, 2001.  This is a little ambiguous, but it looks to me like the UWC was simply made "effective January 17, 2001."

That in itself, if I have the facts correct, is not a false statement.  The law has long recognized that you can do something "now for then" or nunc pro tunc.    Moreover, Section 141(f) of the Delaware GCL makes it clear that a unanimous consent is not the same thing as a meeting.  It is an action in lieu of the meeting.  And one can imagine benign circumstances in which the Board might well want its consent to have been effective retroactively.  Nothing in the Delaware GCL, as far as I can tell, bars that.  Certainly nothing in Section 141(f) does so.

The real problem here is the distinction between what Searles calls illocutionary and perlocutionary acts.   The statement of the effective date is an illocutionary act because it is asserting something to the listener.  Searle says:  "Correlated with the notion of illocutionary acts is the notion of the consequences or effects such acts have on the actions, thoughts, or beliefs, etc., of hearers."  So it is possible that an assertion, wholly true in itself, may have the effect by itself or in conjunction with other statement in particular circumstances, of meaning something else to the listener.   In other words, the speech act in context is perlocutionary. [See update below.]

At this moment, I'm agnostic (but leaning toward a view that there was deception) on the overall context.  But the mere creation of the UWC with an earlier effective date was not, in my view, irregular.

3.  But it does get worse.  The second grant was in October, 2001, and that is the one for Steve Jobs himself.  Here, Heinen created minutes of a Special Meeting of the Board as of an earlier date, where that meeting had not occurred.  That does raise the hair on the back of my neck.  I think I would have said, "I am not going to make up meetings of the Board of Directors of a public company that did not occur.  There is a device called the written consent that we use in lieu of a meeting when there was no meeting."  (I would also distinguish the following.  The discussion at a real meeting gets garbled.  I look around at the directors and say "I think you mean this for your action - I will straighten it out in the minutes."  There is no objection, and I do it.  I don't have a problem with that; minutes are not a transcript, they are minutes.) 

Now we are beyond a true illocutionary act that may be (intentionally or not) deceptive in its perlocutionary context.  The propositions within the illocutionary act are false.  There are references and predicates to things that did not occur.

It also looks like Heinen, without the consent of the Board, removed the reference in the minutes to discussion of option grants to Jobs at an earlier meeting.  This may be false in itself or false in the context; I can't tell from the complaint.

As with the Executive Team options, there is no allegation about the dating on the option grants themselves.  Obviously, there's an inference to be drawn if the option grant dates were accurate, but all the auditors got were either UWCs or meeting minutes suggesting that the option grants actually took place before they did.

So merely the UWC in itself wouldn't raise an issue for me.  But the use of the UWC in context with the auditors as a means of fudging the date of a grant, if as alleged, as well as the creation of minutes to a meeting that didn't occur, would bother the hell out of me as a lawyer and the certifying secretary.

UPDATE: One of Larry Solum's readers has rightly taken issue with my sloppy turn of phrase on perlocutionary acts.  She writes that I have misunderstood speech act theory regarding perlocutionary acts as follows:  "Assertions may of course elicit a range of perlocutionary effects, but the meaning of the assertion does not turn on these effects (an assertion that p that elicits fear in A does not mean something different vis-a-vis B, who reacts with joy). Nor can an assertion be understood "in context" as a perlocutionary act!"

Let me clarify.  The next sentence in Searle after the one quoted above is:  "For example, by arguing, I may persuade or convince someone, by warning him I may scare or alarm him, by making a request I may get him to do something, by informing him I may convince him (enlighten, edify, inspire him, get him to realize)."

My point was that the propositional act in the UWC was a referral to a board and an effective date and options and a predicate that they were approved.  The illocutionary act in the UWC is an assertion by someone in the company that options were approved effective January 17.  That meaning is what it is.  I think the perlocutionary act in this case is the convincing of an auditor by the making of the statement that the options were actually issued then.  Because that's how the listener hears the statement.  And then there is the second order question whether the speaker intended the deception.  But my point there was that there was nothing false in itself about the statement in the UWC.

I am thinking of the example of a trial lawyer who is cross-examining a witness about a letter the lawyer believes the witness sent but has not yet tracked down.  The lawyer picks up a sheet of paper that the witness cannot tell is blank and stares at it for several seconds.  "It's true, isn't it," says the lawyer, waving the paper, "that you sent a letter to Mrs. X on December 4."  There is no ambiguity whatsoever about the meaning of the assertion; the witness understands it just as the lawyer intended it to be understood.  The witness was prepared to lie in response, but thinks the blank piece of paper is the letter, and is frightened by the possibility of being impeached.  So she answers "yes, I did."  Isn't the frightening and/or deception of the witness by the assertion a perlocutionary act with a perlocutionary effect?  In later commentary, Searle refers to necessary "stage-setting" to be able to assess perlocutionary versus illocutionary acts, and it seems to me that has to be "context."  I think of the UWC in the same way.  There was no real issue as to either the clarity or the correctness of its propositional and illocutionary aspects.  But the way it was used induced a particular effect in the listeners.

I agree my original post was incorrect in stating "In other words, the speech act in context is perlocutionary" and in conflating the meaning of the assertion with the perlocutionary effect.  More precisely, the speech act is the speech act.  The perlocutionary act is the fact that by making the statement I may deceive the listener, and, indeed, the listener is deceived. 

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