Saturday, December 30, 2006

"I'll Do the Thinnin Around Here, and Don't You Forget It!"

The immortal words of Quick Draw McGraw to his trusty sidekick, Baba Looey, may be what government investigators from the SEC and U.S. Attorney's Office are saying in light of Apple Computer, Inc.'s disclosure of CEO Steve Jobs' involvement in the company's options issuance practices.  Apple disclosed in October 2006 that Jobs was "aware" of options backdating, and stressed that he did not receive any of the options or benefit financially from any timing.  In its 10-K (here) filed on December 29, the last business day of the year, Apple added a little extra to its description of Jobs' involvement: "Although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications."  The earlier disclosure did not mention him making any recommendations, and only said he was "unaware of the accounting implications," while this one says he did not "appreciate them."  The difference between awareness and appreciation is a fine one, but it moves Jobs a bit closer to potential problems.  Nevertheless, the company has stressed that Jobs did nothing wrong in its view, and that the board continues to support him as outlined in a statement (here) it issued along with the 10-K:

"The special committee, its independent counsel and forensic accountants have performed an exhaustive investigation of Apple’s stock option granting practices,” in a joint statement said Al Gore, chair of the special committee, and Jerome York, chair of Apple’s Audit and Finance Committee. “The board of directors is confident that the Company has corrected the problems that led to the restatement, and it has complete confidence in Steve Jobs and the senior management team.”

Regardless of what the board thinks, government investigators may not have the same sanguine view of Jobs.  While being "aware" of backdating may mean something as innocuous as being cc'd on an e-mail, making recommendations about favorable issuance dates connotes much more active involvement.  The only way to know a date is "favorable" is if the decision is made after the fact, and the key issue will be whether Jobs was cognizant of any falsification of documents or other misleading conduct.  Moreover, Jobs' appreciation of the "accounting implications" of backdating sounds like the beginning of an ignorance defense, but whether he can offer such a position will depend on his level of involvement in the options issuance.  One need not know the minutiae of the accounting and tax issues related to options to understand that changing the dates to increase their value will have an impact on Apple's financial statements. 

The company's disclosure of Jobs' involvement tries to put him in the best light, but I think it is likely that the investigation will probe deeply into the involvement of Jobs and other Apple executives in the backdating.  While the lack of any financial gain to Jobs may cut against a securities fraud claim, the creation of false or misleading documents that cause the company's financial statements to be incorrect is a separate violation, and often the tipping point between a civil and criminal proceeding.  The indictment earlier in 2006 of former Brocade Communications CEO Gregory Reyes involved the very situation in which the executive did not benefit directly from the backdating, but the creation of allegedly false records led to criminal charges.  Look for investigators to act more like Quick Draw in viewing the results of Apple's internal investigation. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2006/12/ill_do_the_thin.html

Investigations, Securities | Permalink

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