Options Troubles Aren't Over for Apple

Apple Inc., on a tear with its popular iPod players and Macintosh computers, is expected to report strong quarterly results Wednesday but will face lingering worries over the role its iconic CEO played in its stock options backdating troubles.

In the first action by federal authorities since Apple's options problems surfaced a year ago, the Securities and Exchange Commission filed civil charges against two former Apple officers Tuesday. But one of the accused -- former Chief Financial Officer Fred Anderson -- pointed a finger at his former boss, Steve Jobs, raising new accusations that experts say could land Jobs in some legal hot water if true.

The SEC said it did not plan to pursue any further action against Apple itself, which cooperated with the government's probe, but it stopped short of saying its investigation was closed. Commission officials declined to comment on whether possible charges could still be filed against Jobs or other current officers.

The lack of clarity was compounded when Anderson cast blame at Jobs after agreeing to settle the SEC charges over his alleged role in the backdating scandal. Anderson, 62, agreed to pay about $3.5 million in fines and penalties but did not acknowledge wrongdoing.

Jerome Roth, an attorney for Anderson, issued a statement saying the former CFO had warned Jobs about the implications of backdating one of the two grants that were the basis of the SEC lawsuit. Roth said Anderson was reassured by Jobs that the board of directors had given the necessary approvals, and that Anderson concluded that the grant was being properly handled.

Roth's remarks contrasted Apple's earlier statements that Jobs was aware of some favorable grant dates but that he neither benefited financially from them nor "appreciated the accounting implications." Apple said in December that its own internal probe cleared Jobs and current management of any misconduct.

Meanwhile, the U.S. attorney's office is still investigating. A spokeswoman for the office declined to comment Tuesday on the status of the case.

Legal experts say the combination of Anderson's new accusations and the pending investigations leave Jobs' culpability in question.

"That statement and the disposition of the SEC does leave Steve Jobs in legal limbo," said Ralph Ferrara, a former general counsel for the SEC who now works at the New York-based firm of LeBoeuf, Lamb, Greene & MacRae LLP. "It leaves him not knowing if he'll be swept up in heaven with Apple or cast into hell."

Apple spokesman Steve Dowling declined to comment on Anderson's claims but pointed to how the SEC named only two former officers in its lawsuit Tuesday. "It did not file (charges) against Apple or any current employees," Dowling said. He declined further comment.

After news of the SEC case and Anderson's statement were released Tuesday, shares of Apple initially plunged more than 2 percent to bottom out at $91.30. But the stock recovered to close at $93.24, down 27 cents, on the Nasdaq Stock Market. The shares rose $1.36, or 1.5 percent, to $$94.60 in morning trading Wednesday.

Besides Anderson, the SEC filed civil charges against Apple's former general counsel Nancy Heinen, 50. Her attorneys vowed to fight the charges.

The SEC accused Heinen of participating in fraudulent backdating and altering company records to conceal the fraud. The charges were in connection with two large options grants that caused the company to underreport its expenses by nearly $40 million, the SEC said.

The first grant, in February 2001, consisted of 4.8 million options to Apple's executive team. The second, in December 2001, was a grant of 7.5 million options to Jobs.

The SEC alleged Heinen modified documents to backdate the grant to Jobs, to reflect that it had been approved during an October 2001 meeting that never occurred. The SEC said the executive team's grant was also fraudulently accounted for and that Anderson should have noticed Heinen's efforts to backdate it. The CFO failed to take steps to ensure that Apple's financial statements were correct, the SEC said.

Marc Fagel, an assistant regional director of the SEC in San Francisco, called the charges "serious." The civil lawsuit was filed at the U.S. District Court of Northern California in San Jose.

Heinen and Anderson "were entrusted to ensure that accurate financial statements are shared with investors, and they failed to do that," Fagel said.

Fagel and Mike Fortunato, an SEC staff accountant who investigated the case, disputed Heinen's claims of innocence and downplayed her attorney's statements that it was an "unfair" case of Heinen being "singled out."

"Documents were altered," Fagel and Fortunato said, "and the fact that the special (October 2001) meeting never happened -- it's hard to accept that she's an innocent victim here."

Anderson and Heinen both left Apple last year as the backdating scandal was unraveling.

Gene Munster, a financial analyst at Piper Jaffray, said Anderson's accusations will fuel investors' worries over Jobs and his critical role in Apple's continued success.

"It gives the appearance that, 'I had a partner in crime and it was Steve Jobs,'" Munster said.

But Munster thinks the SEC would have charged Jobs already if it supported Anderson's claims. Munster predicted that Jobs would ultimately prevail and be able to keep his job with only a small chance that he might face some monetary fines.

Cupertino-based Apple is arguably the highest-profile company among dozens facing stock options scrutiny by the SEC and federal prosecutors.

Backdating stock options is the practice of pegging a grant date to an earlier, lower point in the company's stock price so the recipient could receive a larger windfall in the future.

The practice, which was commonly used across Silicon Valley as a retainment or recruiting tool, is not necessarily illegal in itself but could create legal problems if it is not properly disclosed, leading potentially to inflated corporate profits and underpayments in taxes.

After concluding a three-month internal probe, Apple said in December that it would take an $84 million charge for improperly backdating 6,428 grants from 1997 to 2002.


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